Norges Bank's role in cash distribution.

• Author: Eklund, Trond

During the past few years, Norges Bank has made major changes in its cash operations. These changes have been designed to adjust and clarify the division of responsibility between the various parties involved in cash distribution. Tasks have been allocated in line with this purpose. Norges Bank's overriding consideration has been to adapt the central bank's cash policy so as to increase the efficiency of the payment system. In practice, this involved changes which have been implemented in three stages. 1) discontinuation of commercial services 2) changes in terms for banks' cash deposits in and withdrawals from Norges Bank and 3) changes in the depot structure and introduction of compensation in the form of interest for cash held in banks' own depots. The result of these changes is that the central bank has assumed a more clearly defined role as wholesaler and banks have taken more responsibility for the redistribution of cash amongst themselves.

Moreover, Norges Bank has assessed the organisation of the services and tasks for which the central bank is responsible. The practical consequence of these assessments is that Norges Bank's cash operations are based largely on outsourcing.

This article presents key assessments of the role Norges Bank wishes to have in cash distribution, as well as information about the changes that have been implemented in the period 2001-2005.

1. Background

   Developments since the last part of the 1980s form the background for the changes in Norges Bank's role in the handling and circulation of notes and coins (cash distribution). At that time, Norges Bank provided commercial services to banks, in competition with other market participants. At the same time, these services were provided in connection with Norges Bank's tasks and activities as cash issuer (see Eklund and Veggum, 2002). This was unfortunate since the prices that market participants paid for cash distribution services did not fully reflect the real costs of the services. Therefore, it is probable that demand for these services was based on incorrect price information. In accordance with the Norges Bank Act's provisions concerning the promotion of an efficient payment system, Norges Bank therefore considered it important to find better solutions for cash distribution. The changes have also been part of Norges Bank's general efforts to concentrate on core tasks.

2. An efficient payment system

   In accordance with the first paragraph of the Norges Bank Act, efficiency in the payment system is one of Norges Bank's objectives.

   2.1 An efficient payment system

   The total payment system includes all methods, arrangements and devices that may be used to execute or mediate payments. An efficient payment system is characterised by the existence of available means of payment and payment instruments that are adapted to needs and by the possibility of executing payments quickly, securely and with the lowest possible use of resources. When users are aware of the prices and features of the various alternatives, they will choose the solutions which are on the whole most attractive. If the prices encountered by users reflect the cost of producing the services, the users' choice will result in an efficient overall use of resources.

   Payments are generally executed using two means of payment: account deposits and cash. Whereas moving account deposits largely involves the use of electronic instruments, moving cash requires a large degree of physical handling. This is the case when cash is circulating as a means of payment between banks, businesses and the general public and also when it is out of circulation and belongs to Norges Bank. Moving and storing notes and coins requires a large logistics apparatus and involves considerable costs for many operators. Norges Bank considers it important to facilitate optimal efficiency in the overall payment system. This means that there is an appropriate distribution between cash and account deposits, that cash is supplied and handled as rationally as possible and that security is satisfactory.

   2.2 Efficient distribution and handling of cash

   In order for cash to function as an efficient means of payment, it is necessary that:

   * market participants have confidence in cash

   * cash has features that are adapted to needs

   * cash is available

   * all cash processing is efficient

   Confidence means that users of cash are in no doubt that cash represents claims on the central bank, i.e. that it is genuine central bank money.

   Features adapted to needs refers to denominations, design and durability (that they withstand different types of handling), that genuine notes and coins are easy to recognise etc.

   Availability implies that cash is readily available to the general public and businesses, making it unnecessary to store large amounts of cash.

   Efficient processing means that the scope of transport, counting, sorting, destruction etc. is correct and that there is an appropriate division of responsibility between Norges Bank and others who process cash, so that the tasks are executed with the lowest possible use of resources.

3. Norges Bank's cash distribution policy--important considerations

   3.1 Formal framework

   Within the framework of the Norges Bank Act, Norges Bank determines which functions and services in the overall cash distribution system the central bank is to be responsible for, the scope of these functions and services, and the terms for their use (including who covers costs). Further, Norges Bank determines which tasks within this area of responsibility the central bank is to perform and which are to be outsourced.

   Responsibility

   Under the Norges Bank Act, Norges Bank has the exclusive right to issue notes and coins. This implies a primary obligation to supply cash, i.e. an obligation to issue notes and coins to meet the needs of the economy. This also implies a secondary obligation to supply cash, which means that Norges Bank shall ensure that an adequate supply of the notes and coins issued is available to the public.

   Notes and coins in circulation must be of a certain quality in order to function as an efficient means of payment. Norges Bank has an overriding responsibility for maintaining this quality as well as an obligation to accept worn and damaged notes and coins and replace them with notes and coins of acceptable quality.

   Norges Bank is further obligated to accept deposits from banks, but in special cases may also accept deposits from others. This means that as a rule only banks can make cash deposits in and withdrawals from Norges Bank.

   Tasks

   Of the responsibilities imposed by the Norges Bank Act, there is one statutory responsibility that only Norges Bank can discharge. This is the actual issuing of notes and coins, i.e. functioning as debtor for notes and coins in circulation, as well as determining conditions related to issuing. The other tasks ensuing from this responsibility, such as the production and destruction of notes, may be performed by others, but Norges Bank must ensure that these tasks are performed.

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