Central bank money vs commercial bank money

The BIS defines central bank money as the monetary liabilities of the central bank. In the euro area that means banknotes, which anyone can hold, and the reserves that banks keep on accounts at the Eurosystem. Commercial bank money is the balance on a current account. Banks create it when they lend, as Thomas Jordan of the Swiss National Bank explained in a speech on money creation, and it is a claim on the bank, payable in central bank money.

A deposit carries the credit risk of the bank that holds it. Deposit guarantee schemes cover up to 100,000 euros per depositor and bank under the EU deposit guarantee directive, and supervision and capital rules make failures rare; central bank money carries no credit risk, because the central bank cannot run out of its own currency.

When a customer of one bank pays a customer of another, the banks settle the difference in central bank money. Large payments between banks run through T2, the Eurosystem real-time gross settlement system, and instant payments through TIPS, both covered on TARGET2 and TIPS. Final settlement in central bank money is why a bank transfer is safe even though the payer only ever moved a deposit.

Both kinds of money trade one for one. A euro in a Sparkasse account, a euro at a private bank and a euro banknote are worth the same, and that rule, the singleness of money, holds because deposits can always be turned into central bank money at par.

New forms of money test that structure. Tokenized deposits are commercial bank money on a ledger. Stablecoins are claims on a non-bank issuer backed by reserves. The digital euro would give the public a second form of central bank money next to cash, with a holding limit so that deposits do not drain from banks, which digital euro holding limits covers.

For wholesale markets the Eurosystem plans settlement of tokenized transactions in central bank money, described on wholesale CBDC. The BIS Annual Economic Report 2023 proposes a unified ledger in which tokenized reserves and tokenized deposits sit side by side.

Central bank money is money issued by the central bank: cash and the reserves commercial banks hold at the central bank; central bank money carries no credit risk.

Commercial bank money is the balance on a bank account. Commercial bank money is a claim on the bank that keeps the account and is created mostly when banks lend.

A bank deposit is worth the same as cash because a bank must pay out deposits in central bank money at par, and supervision and deposit guarantees support that promise, while payments between banks settle in central bank money.