Consequences of Non-Convertibility
Imagine a modern banking system where commercial banks hold electronic deposits at the central bank, but they are not permitted to exchange these deposits for physical currency. Explain two significant problems this restriction would create for a commercial bank's daily operations.
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Example of Converting Reserves to Currency for ATM Replenishment
A commercial bank anticipates a large volume of cash withdrawals by its customers over an upcoming holiday weekend. The bank currently has ample funds held as electronic deposits in its account at the central bank, but is low on physical banknotes in its own vaults. What is the most direct and standard action the bank can take to prepare for this expected demand for cash?
Consequences of Non-Convertibility
If a central bank were to eliminate the ability for commercial banks to exchange their electronic reserve balances for physical currency, this change would primarily disrupt a bank's ability to process large-scale electronic payments between itself and other financial institutions.
Managing Excess Currency