De Nederlandsche Bank Eurosysteem GENERAL FRAMEWORK AND OVERVIEW Carlo Winder Conference Financial...

De Nederlandsche Bank Eurosysteem

GENERAL FRAMEWORK AND OVERVIEW

Carlo Winder

Conference Financial Sector of Macedonia on Payments and Securities Settlement Systems

Ohrid 23 June 2008

De Nederlandsche Bank

Agenda

Definitions and Concepts

Role of central banks

International developments

IT´S ALL ABOUT

FINANCIAL STABILITY

MONETARY STABILITY: stable currencyFINANCIAL SECTOR STABILITY: reliable

financial institutionsPAYMENT SYSTEM: smooth and secure

payments

Mission of the central bank

De Nederlandsche Bank

Safeguarding the stability of the financial system and the institutions that are part of it, by contributing to the monetary policy of the Eurosystem

supervising the financial soundness and integrity of financial institutions

promoting the smooth functioning of the payments system

Payment systems policy

OBJECTIVES

MAIN GOALto promote safe and efficient payment and

settlement systems

Other goals (central bank specific)e.g. crime prevention, effective competition,

consumer protection, accessibility

Payment system is all about trust...

Trust Trust Trust Trust Trust

Currency

Issuer

Payment system

Authenticity

Constitutional state

Importance payment systems

Payment systems …

… facilitate the exchange of goods and services

… are necessary to conduct monetary policy

… can be transmission channels of ‘disturbances’ (financial crises)

buyer seller

good/service

debit paymentinstruction

bank bank

paymentinstruction

debit credit

credit

paymentinformation

CENTRAL BANK

Payment chain

buyer seller

good/service

debit paymentinstruction

CENTRAL BANK

bank bank

paymentinstruction

debit credit

creditpaymentinformation

CLEARING

paymentinformation

RETAIL PAYMENTS

buyer seller

CENTRAL BANK

bank bank

Payment chain

WHOLESALE PAYMENTS

buyer seller

bank bank bank bank

CENTRAL BANK

Payment chain

Payment Pyramid - Eurosystem

Retail versus wholesale payments

Low value ↔ Large value

High volume ↔ Low volume

Consumers and ↔ Financial institutions businesses

Time less important ↔ Time critical

Low systemic risk ↔ High systemic risk

RETAIL PAYMENTS

TRENDS/ISSUES

● growth of card payments

● costs of payments

● interchange fees

● innovations

GROWTH OF CARDS PAYMENTS

COSTS OF PAYMENTS

World Retail Banking Report 2005

Interchange Fees

Gresham´s law of payments

Traditionally: Bad currency drives out the good

High-cost payment instruments drive out low

cost ones

Bank Aissuer

consumer retailer

Bank Bacquirer

Merchant Fee

Interchange Fee

STRUCTURE OF CARD PAYMENT

Gresham´s law of payments

UNITED STATES

Competition between credit card schemes

higher prices because of interchange fees

Innovations

EXAMPLES

• internet banking, on line banking

• biometric identification

• contactless cards

WHOLESALE PAYMENTS

DNS: Deferred Net SettlementMultilateral, usually at the end of the day

RTGS: Real Time Gross Settlementcontinuous (real-time) settlement of funds

transfers individually on an order-by-order basis

WHOLESALE PAYMENTS

TRENDS/ISSUES

● Liquidity management Real time settlement → higer demands on

liquidity management T2: range of tools to control, monitor and

manage liquidity

● Operational resilience, e.g. as a result of global interdependencies

Securities Settlement Systems

A typical settlement transaction has Cash LegSecurities Leg

and involvesCSD: Central Securities DepositoryLVPS: Large Value Payment SystemCCP: Central Counterparty

BANK A BANK B

Interfaced / Integrated Model

InterfacedCSD has the securities account, CB the cash

account. Communication through an interface

IntegratedCB or CSD operates both the cash and

securities account, e.g. CB outsources cash settlement CB insources securities settlement

BANK A BANK BCCP

CSDs settlement of securities transactions depository of securities corporate actions

CCPs buyer to the seller seller to the buyer often uses multilateral netting (clearing) contributes to efficiency, mitigates risk

TRENDS/ISSUES

Settlement risks (DVP) Multiple platforms Cross border links (global

interdependencies)

Large Value Payment Systems

CLS: Continuous Linked Settlement

● FX Risks

● basically a ´guaranteed refund´ scheme, i.e. you will either receive the correct currency or a refund

Traditional cross border transaction

D BANK A2BANK A1

D BANK B2 C

BANK B1

Bank 2Bank 1

Japanese payment system

US payment system

A: Japanse corresponden

B: Japanse corresponde

B: US corresponden

A: UScorresponde

Correspondent banking: FX transaction

CLS BankCLS Bank

Continuous Linked Settlement CLS

Bank B

Bank AA:

Settlement

member

B:Settleme

nt member

Settlement

member

B:Settleme

nt member

FX transaction, via CLS

POLICY OBJECTIVES OF CENTRAL BANK

MAIN GOAL

promote safe and efficient

payment and

settlement systems

How to Achieve Policy Objectives?

OPERATIONS

OVERSIGHT

CATALYST

Operational role central bank

Issuance and distribution of cashOperator large value transfer systemSettlement services retail transactionsCash settlement securities transactionsClearing services retail payments Operator securities settlement systemOther securities related servicesPublic sector payments

Oversight

‘a public policy activity focused on the safety and efficiency of systems, in particular to reduce systemic risk’.

Oversight

Scope central bank oversight varies:

just systemically important systems, including securities settlement systems

including retail systems

Including payment instruments

Catalyst

Case for intervention, but not necessarily regulation or operations

‘Third way’ - ‘guide’ the market, by promoting initiatives and co-operation

between stakeholdersbetween other public authorities, e.g. - Government- Competition authorities

Securitiessettlement

RetailLargevalue

Operations

Oversight

Catalyst

Minimal role

Emphasis on oversight (e.g. DNB)

RetailLargevalue

Operations

Oversight

Catalyst

Emphasis on operations (e.g. Fed)

RetailLargevalue

Operations

Oversight

Catalyst

International developments

KEY WORDS

Globalization Consolidation Financial Sector

NEED FOR FURTHER COOPERATION National Supervisors Competition Authorities Government● International

International cooperation

Bank of International Settlements

Main CommitteesBCBS (Bazel Committee of Banking Supervisors) CPSS (Committee on Payment and Securities Settlement)CGFS (Committee on Global Financial Stability) Irving Fisher Committee on Central Bank

Statistics

Clearnet

LondonClearingHouse

Austraclear

Euroclear

Clearstream

Monte Titoli

OM-VPC

HKSCCJasDec

FedWire

ELLIPSTBF/ TOP

BI REL

RTGSPLUS

LIPS-Gross

BoJ-NetRITS RTGS

CLS Bank

E/ K RIX

BoF-RTGS

SWIFT-RTGS

HERMES

BOGS/ CSD

SITEMEInterbolsa

EuroCCP

al Exc

icatio

ive Tr

STP Pr

Traditional Exchanges

Electronic Comm

unications Networks

Alternative Trading Systems

Over The Counter Trading

STP Providers

al Exc

icatio

ive Tr

Traditional Exchanges

Electronic Comm

unications Networks

Alternative Trading Systems

Over The Counter Trading

STP Providers STP Pr

TARGET

CSD Links

2nd wave CLS currency

Financial European integration – why?

EURO AREA: 13 National Markets

Limitations on Competition

Diseconomies of Scale

Inefficiencies wrt cross-border flows of money, securities and collateral

Financial European integration – how?

1. INSTITUTIONAL ARRANGEMENTS

2. FINANCIAL MARKETS

3. INFRASTRUCTURES →payment and securities settlement systems

INFRASTRUCTURES Essential for Financial Stability Central Banks Play Key Role

Financial European integration – how?

EURO AREA PROJECTS

TARGET 2TARGET 2 SecuritiesCCBM2SEPASECA

De Nederlandsche Bank Eurosysteem GENERAL FRAMEWORK AND OVERVIEW Carlo Winder Conference Financial...

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