Money, accounts, and ledgers

IN ONE LINE

The balance in your banking app is not a pile of notes in a vault — it is a promise from your bank to pay you that amount when you ask.

Different banks issue their own promises, so a promise from one bank is not automatically useful at another.

Analogy: store credit.

Points earned at Shop A are worthless at Shop B.

If Shop A ends up owing Shop B because customers moved points around, the two shops need something they both trust to square up — say, accounts they each hold at the same trusted warehouse.

Banks solve it the same way: they hold accounts at the central bank, whose promises every bank accepts, and use those to settle among themselves.

Money on those central bank accounts is called central bank money; the promises your bank makes to you are commercial bank money.

WHAT IT ACTUALLY IS

A bank deposit is a liability of the bank that holds it: commercial bank money.

Cash and balances held at the central bank are claims on the central bank itself: central bank money.

The distinction matters because commercial bank money carries the credit risk of the issuing bank, while central bank money does not — a central bank cannot run out of its own currency.

When a customer of Bank Alfa pays a customer of Nordbank, the customers' balances change in commercial bank money, but the two banks discharge the obligation between themselves by moving central bank money across their accounts at the central bank.

Every payment therefore touches at least two ledgers, and each entry has an equal and opposite counterpart — the double-entry principle that makes books provable.

HOW IT WORKS

Inside a bank, a payment is a chain of ledger postings.

The customer account sits on the core banking ledger; alongside it live internal accounts — settlement accounts, suspense accounts for funds awaiting a home, fee and foreign-exchange position accounts — and the bank's accounts with outsiders: its reserve account at the central bank and nostro accounts at other banks.

When a transfer leaves, ops expects a debit to the customer and a matching credit to whichever settlement or nostro account funds the outward leg.

Reconciliation teams then prove those internal entries against statements from the central bank and correspondents.

Naming and structure vary widely between institutions, but the discipline is constant: every posting must balance, and every balance must be explainable.

THE WORDS

Commercial bank money

Money that is a claim on a commercial bank — the balances in ordinary bank accounts. Most everyday payments move this kind of money.

Central bank money

Money that is a claim on the central bank — banknotes and the balances banks hold in accounts at the central bank. No commercial credit risk.

READ FIRST

• What a payment actually is

CONNECTED TO

• CHECKPOINT Payments basics checkpoint

SOURCES

• A glossary of terms used in payments and settlement systems — CPSS (now CPMI), Bank for International Settlements
• Payments Signal editorial teaching models — Payments Signal