Why are central banks preferred as settlement service providers?

Central banks are preferred as settlement service providers primarily because they are independent institutions that typically maintain a high credit standing. Their independence allows them to make monetary policy decisions without political pressures, which enhances their credibility in the eyes of market participants. Additionally, a high credit standing signifies reliability and trustworthiness, essential qualities for entities involved in settlement processes that require certainty and stability. This high level of trust facilitates smoother transactions and risk management in financial markets.

In contrast, while some may argue about the importance of operational costs, the unique role and responsibilities of central banks go beyond mere operating efficiency. Their government ownership does convey a level of public trust, but it is their independence and high standing that are more crucial to their preference as settlement service providers. Lastly, although they may have a global reach, it is the intrinsic qualities of trust and independence that ultimately solidify their role in settlements.