The latest event in the Bundesbank Invited Speakers Series saw Darrell Duffie, professor at the Stanford Graduate School of Business, and Bundesbank Executive Board member Fritzi Köhler-Geib discuss the importance of payment systems in conjunction with central banks.

Darrell Duffie used his opening speech on the payment system and the Fed’s balance sheet to explain how demand for central bank reserves had changed since the global financial crisis. He noted that banks today needed far more reserves than they did before the crisis. Alongside regulatory requirements, the requirements of the payment system played an important role in this regard as well. If reserves within the system fell too sharply, that could complicate the smooth settlement of payments and cause tensions in money markets, he observed.

Payments determine need for reserves

Duffie stressed that large banks needed sufficient holdings of central bank reserves in order to be equipped to settle payments reliably at all times. There were regulatory and prudential reasons why they did not draw on the temporary liquidity facilities provided by the central bank, he explained. Recent experience had shown that money market rates can respond sensitively if reserves in the financial system become scarce.

Against this backdrop, Duffie then discussed different ways in which central banks could lower demand for reserves. These included adjusting payment systems, altering regulatory frameworks and remunerating reserves.

Panel with Fritzi Köhler-Geib on structural change in the financial system

In a panel chaired by Falko Fecht, head of the Bundesbank’s Research Centre, Darrell Duffie then discussed with Bundesbank Executive Board member Fritzi Köhler-Geib how structural change in the financial system was impacting on central banks. Köhler-Geib spoke about the changes the financial system had experienced since the global financial crisis. One other major talking point was the manner in which digital innovations like stablecoins are going to transform the financial market infrastructure, and the impact this will have on monetary policy and financial stability.

As part of the Bundesbank Invited Speaker Series, the Bank discusses current research and central bank-related topics with researchers and academics.