Money, accounts, and ledgers
Your balance is your bank's promise. Commercial bank money, central bank money, and why the difference decides how banks settle with each other.
L0 Explain simply
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.
L1 Core concepts
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.
L2 Practitioner view
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.
L3 Technical details
Ledger mechanics arrive in pairs that must never be confused. The booking date is when an entry hits the books; the value date is when the amount starts counting for interest — the two diverge around weekends, cut-off times, and back-valued corrections, which is why interest claims are argued in value dates, not booking dates. Ledger balance is the sum of posted entries; available balance subtracts holds and reservations, and is what payment validation actually checks. Many payment engines first place a memo post — a provisional entry earmarking funds — and convert it to a real posting when the payment is released; if the payment dies in between, the memo post must be released too. And errors are never erased: a wrong posting is cancelled by an equal and opposite reversal entry, so the ledger shows both the mistake and its correction.
Sources for this topic2
- Market practiceMarch 2003 edition
A glossary of terms used in payments and settlement systems ↗ — CPSS (now CPMI), Bank for International Settlements · definitions of central bank money and commercial bank money
Terminology has evolved since this edition; newer CPMI publications refine some definitions.
- Simplified educational illustration
Payments Signal editorial teaching models — Payments Signal
What this simplifies: The two-bank ledger illustration shows one settlement account per bank and immediate interbank settlement; real banks maintain many internal accounts and settlement timing depends on the rail.
Used wherever diagrams, scenarios, figures, or example values are didactic constructions rather than sourced facts; every such use carries a simplifications disclosure. All people, companies, banks, and list entries in examples are fictional.
Deepest material on this page: L3 — Technical details. Where a topic stops short of implementation depth, that is a deliberate coverage decision, not an oversight — see coverage.