Intraday Liquidity and Central Bank Accounts

Every bank that participates directly in a payment system holds a settlement account at the central bank. The balance in that account is the bank's primary source of intraday liquidity. At the start of the day, the balance reflects the bank's overnight position plus any funds it has moved in from other accounts. As payments settle, the balance falls when the bank sends payments and rises when it receives them. The bank's job is to keep the balance above zero all day, while using as little idle balance as possible, because idle balances earn little return. Central banks help by providing intraday credit, which is short term funding that a bank can draw on during the day and must repay before the close of business. Intraday credit is usually collateralised, meaning the bank must pledge securities such as government bonds to secure it, and it is usually free or very cheap, because the central bank wants payments to flow smoothly. The amount of intraday credit available, and the collateral required, are key parameters that shape how much liquidity a bank can access in a crisis. Banks also manage their intraday position actively. They monitor their balance in real time, forecast incoming and outgoing payments, and move funds between accounts when needed. Some payments are predictable, such as salary runs and known loan repayments, while others are not, such as large corporate payments that arrive without warning. Treasury teams use historical patterns, customer information and real time monitoring to build a forecast, and they adjust it through the day as actual flows differ from the forecast. The quality of this forecasting is a major determinant of how smoothly a bank settles. Work the numbers for one morning. Bank A starts the day with EUR 80 million in its central bank account. It also holds EUR 220 million of government bonds pledged as collateral for intraday credit. The central bank applies a haircut of 10 percent to the bonds, so the usable credit is EUR 198 million, not EUR 220 million. At 10 in the morning the bank draws EUR 60 million of intraday credit to cover a cluster of large outgoing payments, and by half past four in the afternoon the incoming payments have arrived and the credit is repaid in full. Intraday credit costs little or nothing, because the central bank wants payments to flow, but it must be repaid before the close of business. If the bank fails to repay, the intraday borrowing converts to overnight borrowing at a penalty rate, and the bank pays for the mistake. The forecast matters too. A salary run of EUR 45 million is predictable and is in the morning plan, but a corporate payment of EUR 30 million that arrives without warning is not, and treasury keeps a buffer for exactly that kind of surprise. An analyst specifies the machinery behind this in four places. First, the collateral eligibility list. Which securities the central bank accepts, and the haircut for each type. Second, the auto sweep rules. When surplus funds move out of the settlement account at the end of the day, and when funds move in. Third, the forecasting inputs. Known payment runs, customer information, and historical patterns, with a named owner for keeping them current. Fourth, the end of day check. A control that confirms all intraday credit is repaid and flags any balance that will convert to overnight borrowing. A bank that cannot produce that check before the close of business is flying blind on its most expensive risk.