Central Banks as Bankers to Each Other: Overview, Trends, and Future Directions in Global Official Sector Service Provision

Abstract

The choice of custodial and banking relationships is an underappreciated but important consideration for reserve managers in managing their overall risk profile. The major reserve currency central banks have long served as correspondent banks, transactional agents, and custodians for the safekeeping of foreign reserves for each other and the global central banking community. The ability of central banks to provide each other with safe, confidential, and reliable banking and custody services (BCS) has provided important public benefits, aiding in central banks’ execution of foreign reserve management, monetary policy implementation, financial stability operations, and other mission-critical central bank activities. In the decade since the global financial crisis, and demonstrating the continued strong policy rationale for the inter-central bank provision of BCS, official BCS volumes have continued to grow, reflecting broader global reserve accumulation patterns, the impact of regulatory reforms, counterparty risk perceptions, correspondent bank de-risking, official cross-border financial stability initiatives, and other trends. More recently, the increasingly dangerous cyber threat to wholesale payments security has led central bank providers of BCS and their central bank clients to adapt in order to better protect foreign reserve assets from criminal actors.