Central bank money versus commercial bank money

Central bank money and commercial bank money are two different liabilities, and a payment system exists to convert one into the other safely. Central bank money is a liability of the central bank: physical cash held by the public, and reserves held by banks in accounts at the central bank. Commercial bank money is a liability of a commercial bank: the balance in a customer current or savings account, which is a claim on that bank. The two layers are linked, but they are not the same money, and treating them as identical is a design error. Source: Bank for International Settlements, Committee on Payments and Market Infrastructures; Bank of England, What is money. The parties and their claims are simple to state and easy to get wrong in a specification. A holder of central bank reserves holds a claim on the central bank, which cannot default in its own currency. A holder of a commercial bank deposit holds a claim on that bank, which can fail, and whose deposits are protected only up to the guarantee limit, EUR 100,000 per depositor per bank under the EU Deposit Guarantee Schemes Directive. A bank that holds only a nostro balance at another commercial bank depends on that bank, and if the correspondent fails, the balance is at risk. This is why high value settlement uses central bank money. A worked example makes the two layers visible. Bank A in Paris and Bank B in Berlin both hold reserve accounts at the Eurosystem, and a customer of Bank A pays EUR 2 million to a customer of Bank B through T2. Bank A debits its customer EUR 2 million in commercial bank money, Bank A reserve account at the central bank falls by EUR 2 million, Bank B reserve account rises by EUR 2 million, and Bank B credits its customer EUR 2 million in commercial bank money. If the same payment had been settled through a nostro account instead, Bank A would have debited its nostro at Bank B, and the finality would have depended on Bank B, not on the central bank. The mechanism is different again for retail payments, and the difference matters for timing. A EUR 50 card payment moves commercial bank money between the cardholder and the merchant accounts, and the interbank settlement is netted and settled later in central bank money through the clearing system. An instant payment under SCT Inst, by contrast, must be settled within 10 seconds under Regulation (EU) 2024/886, and the settlement in central bank money through TIPS happens in the same window, so the gap is measured in seconds rather than hours. A business analyst must state, for each product, when the customer sees the money and when the banks settle in central bank money, because the two are different events. Failure shows the layers separating. If a commercial bank fails, its customers lose access to their commercial bank money until deposit protection pays out, but payments between other banks continue, because central bank money is unaffected. The Bank of England CHAPS system and the Eurosystem T2 system both publish operating hours, cut-offs and contingency procedures for exactly this reason, and a bank payment hub must hold payments, queue them, or reroute them when the central bank layer is unavailable. A hub that assumes the central bank layer is always available has no failure plan for its most important dependency. The effect on the bank, the customer and operations is concrete. For the customer, a payment in central bank money is final and cannot be unwound by the failure of an intermediary, while a payment that depends on a chain of commercial bank claims carries the credit risk of every bank in the chain. For the bank, holding reserves at the central bank is the safest liquidity, and intraday liquidity management is largely the management of reserve balances against outgoing payments, with collateralised intraday credit from the central bank as the backstop. For operations, reconciliation has two sources: the customer ledger for commercial bank money, and the central bank statement for reserves, and the two must agree at the end of the day, with any difference investigated as a break. For a business analyst, product owner or subject matter expert, the practical test is to trace any payment through both layers and name the settlement asset at each step. A cross-border payment settles in commercial bank money through nostro accounts, unless it reaches a central bank system at one end, and the Herstatt risk in cross-border payments is precisely the risk that one leg settles in commercial bank money while the other does not. The ISO 20022 messages make the layers visible: pacs.008 carries the customer credit transfer, pacs.009 carries the financial institution credit transfer that moves value between banks, and camt.053 reports the central bank account statement that proves settlement happened. Two common mistakes must be avoided in requirements. The first is calling a nostro balance central bank money, which understates the risk, because a nostro is a claim on a commercial bank. A third mistake is assuming that an instant customer credit means instant interbank settlement, which is true for SCT Inst through TIPS but not for every instant system, and the difference must be written into the product description and the customer terms. The Bank for International Settlements and the European Central Bank publish clear explanations of these layers, and a requirement that contradicts them will be challenged by treasury, risk and operations at the first review. Takeaway: central bank money is a claim on the central bank and settles with finality, commercial bank money is a claim on a commercial bank and settles only when the interbank leg completes in central bank money. Every payment moves both layers, and the design must name the settlement asset, the settlement system and the timing for each. Deposit protection covers commercial bank money only up to EUR 100,000 per depositor per bank in the EU. Further reading: Bank for International Settlements, Committee on Payments and Market Infrastructures, A glossary of terms used in payments and settlement systems; European Central Bank, TARGET services; Bank of England, What is money. Last reviewed 7 November 2026.