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Why payment systems at central banks?

As issuers of money, central banks have always had a keen interest in the smooth functioning of the national payment system and the way it affects the economy. Central banks have taken on a prominent role in the pursuit of maintaining trust in the currency and ensuring its smooth circulation.

Flowchart of payment systems at central banks

Source: ECB.

There is a strong motivation for central bank involvement in payment, clearing and settlement issues. Modern economies are dependent on the safe and efficient flow of transactions. The smooth functioning of payment, clearing and settlement systems increases users’ confidence in those systems and, ultimately, public confidence in the currency.

The functioning of these systems also has an impact on the stability of financial institutions and markets, and may affect systemic stability. Such systems are also essential for the implementation of monetary policy. Payment, clearing and settlement systems are important for financial markets and the functioning of the economy as a whole, and are therefore important for the welfare of society.

Role of central banks’ payment systems

As the operator of a payment system, a central bank offers settlement in central bank money. The central bank allows financial institutions to transfer funds which are held in accounts with that central bank among themselves. Central banks’ payment systems are typically used for the final settlement of claims originating from interbank operations and so-called ancillary systems.

Central Bank's payment systems

Ancillary systems include the following systems:

  • retail payment systems,
  • large-value payment systems,
  • foreign exchange systems,
  • money market systems,
  • clearing houses,
  • central counterparties
  • and securities settlement systems.

Central banks can also have an operational role in the processing of retail payments. In some countries, the central bank also operates securities settlement infrastructure. Acting in an operational capacity is one way for the central bank to ensure that the system or service in question meets the safety and efficiency standards it has set. A central bank will usually cooperate closely with the banking system when developing the facilities it operates.

TARGET - A Eurosystem payment service

TARGET was developed by the Eurosystem, the central banking system of the euro area. It offers a premium payment service across national borders in the European Union (EU).

Main objectives of TARGET

  • Supporting the implementation of the Eurosystem’s monetary policy and the functioning of the euro money market;
  • Minimising systemic risk in the payments market;
  • Increasing the efficiency of cross-border payments in euro.

By meeting these objectives, TARGET contributes to the integration and stability of the euro area money market.