Building block 11: Exploring reciprocal liquidity arrangements across central banks (liquidity bridges)

A liquidity bridge is a cross-currency intraday liquidity arrangement between two or more central banks. In a liquidity bridge, RTGS system participants pledge collateral – typically cash – to a given central bank ("facilitating central bank") in exchange for short-term (typically intraday) liquidity from another central bank ("lending central bank") in the latter's currency. BB11 explores the potential risks and benefits of these arrangements.

Objective

Liquidity bridges may offer multiple benefits for cross-border payments by improving the efficiency and effectiveness of the global liquidity pool within banking groups operating in several currencies. These benefits include lowering the opportunity costs associated with holding liquidity buffers in multiple currencies and reducing the FX and credit risks for participants who raise intraday liquidity through FX transactions with commercial counterparties. Liquidity bridges could also potentially confer broader financial stability benefits, for example, by reducing intraday settlement risk across borders. Overall, these benefits may reduce funding costs and risk, thus positively affecting the quantitative targets for addressing cross-border payments.

Progress

• As part of the exploratory phase of the BB11 work programme, in 2021 the CPMI consulted central banks that have already established reciprocal liquidity arrangements as well as their actual and potential users, in the form of an industry workshop.
• In 2022 the CPMI conducted further analysis and subsequently published the framework that could be used by central banks considering establishing liquidity bridges.