New on FinoLib · Volume I: Global Economy
New on FinoLib, my finance education website: I have published an article called Central Banks vs Commercial Banks and How SWIFT Moves Money, from Volume I: Global Economy. Here is what the article explains, written as a short expert briefing; the full piece, with every worked example, is one click away.
3.3 Central Banks vs Commercial Banks
The idea in plain words
The central bank creates base money: currency and reserves. Commercial banks create the deposits the public uses and settle with each other through reserve accounts at the central bank. The central bank steers through the price of reserves and acts as lender of last resort.
Key points
■A deposit at JPMorgan Chase is a promise by that bank, while a reserve balance at the Fed is a claim on the state’s own bank, which is why central bank money is the final money of the system.
■In the US the Fed pays interest on reserve balances (3.90% from September 17, 2026) and lends at the primary credit rate (4.00%), which caps what a sound bank should pay for overnight money.
A closer look
The two tiers are tied together by one account. Every commercial bank holds a reserve account at the central bank, and every payment between customers of different banks ends as a transfer between those accounts. That is why central bank money is the final money of the system: a deposit at JPMorgan Chase is a promise by JPMorgan Chase, while a reserve balance at the Fed is a claim on the state’s own bank. Commercial banks create the deposits the public uses, by lending, and they bear the credit risk; when they misjudge it, their shareholders’ capital takes the loss first.
Recap
The central bank creates base money (currency and reserves); commercial banks create the deposits the public uses and settle with each other through reserve accounts at the central bank. The central bank steers through the price of reserves (in the US: IORB, the ON RRP rate and the discount window’s primary credit rate) and acts as lender of last resort to solvent banks short of cash.
3.4 Central Banks Around the World
The idea in plain words
Each major economy has its own central bank with its own emphasis, from the Fed’s dual mandate to the Bank of Japan’s decades of fighting deflation.
Key points
■The Fed has a dual mandate, and the ECB runs a single policy for 21 euro-area countries.
■The RBI actively uses CRR and SLR, the PBOC acts under State Council direction, the BoJ has spent decades fighting deflation and the SNB has intervened against franc appreciation.
A closer look
Central banks are compared by their mandate and by how far their policy rate sits above or below inflation. The real policy rate, the nominal rate minus inflation, shows whether policy is tight or loose, whatever the headline rate looks like.
A worked example
Worked Example — Three Central Banks, Three Stances (Illustrative)
Three central banks hold their policy rates at 4.0%, 2.5% and 6.5% while inflation runs at 3.0%, 2.0% and 5.0%. Central bank Policy rate Inflation Real rate Target gap (target 2%) A 4.0% 3.0% +1.0 pt +1.0 pt B 2.5% 2.0% +0.5 pt 0.0 pt C 6.5% 5.0% +1.5 pt +3.0 pt Result: C has the highest policy rate and the highest real rate, but also the biggest miss of the target; B has the lowest rate yet is exactly on target. A high rate does not by itself mean tight policy or failing policy.
3.5 How Money Crosses Borders — SWIFT and Correspondent Banking
The idea in plain words
SWIFT carries payment instructions, while correspondent accounts and settlement systems move the money, and every currency settles at home. Because dollar payments end on US books, control of correspondent access is sanctions power.
Key points
■More than 11,500 institutions in more than 220 countries and territories are connected to SWIFT, sending more than 53 million messages a day on average.
■Netting shrinks the money that must move: three banks owing $100 million, $90 million and $80 million need $270 million settled gross, but one $20 million payment settles everything netted, 13.5 times less.
A closer look
When money needs to move from a bank in Mumbai to a bank in New York, two pieces of infrastructure make it possible. First, correspondent banking: banks maintain accounts with each other across borders. Bank A in India holds a nostro account (Latin: “our account”) at Bank B in the US — Bank A’s funds, held at Bank B. Bank B records this as a vostro account (Latin: “your account”) — Bank A’s money, held on Bank A’s behalf. When a cross-border payment is needed, it moves through these pre-existing bilateral relationships.
Follow one payment to see the pieces work together. An importer in Mumbai pays a US supplier $250,000:
What the full article covers
In the full article I take you through these sections:
■3.3 Central Banks vs Commercial Banks
■3.4 Central Banks Around the World
■3.5 How Money Crosses Borders — SWIFT and Correspondent Banking
It includes worked examples, a look under the hood at the mechanics, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume I: Global Economy
Read the full article on FinoLib
The complete article, Central Banks vs Commercial Banks and How SWIFT Moves Money, with every worked example, diagram, quiz and source, is free to read in Volume I, Global Economy on finolib.com.
Explore the Finance Education Series: Vol. II — Capital Markets · Vol. I — Global Economy · Vol. III — Finance Encyclopedia · Vol. IV — Finance Careers · Vol. V — Personal Finance