Emily EIsner of the NY Fed writes: The main liabilities of central banks are typically currency (banknotes) and reserves, a form of money that can only be held by banks at the central bank  Banks use reserves to make payments among themselves and to the central bank. In addition, some central banks issue deposits to the government. These accounts function as the government’s “checking account” at the central bank.

The Federal Reserve was a central bank that, before the crisis, held mostly currency as its main balance sheet liability. Currency represented 93 percent of the Fed’s liabilities in December 2006, with reserves only 1.5 percent and the Treasury’s general account half a percent. Currency is a sizable liability on most central bank balance sheets in normal times.

Other central banks had a much larger share of their liabilities as reserves before the crisis. One reason to issue a lot of reserves in normal times is to help interbank payments run smoothly; if the supply of reserves is small, banks concerned about running out of reserves at the end of the day may choose to delay payments to other banks, which can create “gridlock.”

As an example, the Norges Bank issued a relatively large amount of reserves before the crisis – 7 percent of its liabilities. Almost 50 percent of the liability side of the Norges Bank balance sheet at the end of 2006 was made up of treasury deposits, and currency represented only 16 percent of liabilities, so its balance sheet looked more like the figure below.

Currency and reserves are “immediate” maturity liabilities, since they can be instantly transferred to other parties for payment. Some central banks also issue term maturity liabilities, either term deposits, which are only available to counterparties that hold a central bank account, or term repos, which are collateralized and available to counterparties beyond depositing institutions. Some central banks have the authority to issue bills. Like Treasury bills, central bank bills are available to nonaccount holders in the secondary market, although some central banks restrict primary issue to account holders. Term liabilities can be issued both to reduce the amount of reserves in the system and to control the central bank’s target interest rate. (This composition is depicted in the figure below.)

For instance, the Bank of England (BoE), the European Central Bank (ECB), the Fed, and the Reserve Bank of Australia (RBA) have been fine-tuning term deposit facilities and repo instruments that have longer maturities than overnight. The BoE, the ECB, the Swiss National Bank, and the RBA are among the central banks that have the ability to issue bills, the Fed does not currently have this authority. Central Bank Assets