4th Conference on Payments and Securities Settlement Systems Ohrid, republic of Macedonia, 20 June 2011
Central Banks and the Dynamic World of Payments and Securities Settlement Systems
Michael van Doeveren
John Shephard-Berron 1926-2010
Agenda
Definitions & Objectives Roles of Central Banks in Payment Systems Financial Crisis Global Dependencies Financial Integration Discussion Points
Role of Central Banks
IT´S ALL ABOUT
FINANCIAL STABILITY and CONFIDENCE
Mission of the Central Bank
De Nederlandsche Bank:Safeguarding the stability of the financial systemand 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 payment
system
Payment Systems Policy
Main Goal to promote reliable, efficient and secure payment and
securities settlement systems
Other Goals: central bank specific• Crime prevention• Effective competition• Consumer protection• Reachability & Accessibility• Research and statistics (knowledge centre)
How to Achieve Policy Objectives?
OPERATIONS
OVERSIGHT
CATALYST
Operational role of a Central Bank
Issuance and distribution of cash Operator large value payment system Settlement services retail transactions Cash settlement securities transactions Clearing services retail payments Operator securities settlement system Other securities related services Public sector payments
Oversight ‘A central bank activity focused on the safety and
efficiency of payment and securities settlement systems, in particular to reduce systemic risk’.
Catalyst
There is a case for intervention, but not necessarily via regulation or operations
‘Guide’ the market, by promoting initiatives and cooperation
Between stakeholders Between other public authorities
• Government• Competition authorities
Importance of 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)
Payment System (1)
Funds Transfer System: a formal arrangement based on a private contract or legislation, with multiple membership, common rules and standardised arrangements, for the transmission, clearing, netting and/or settlement of monetary obligations arising between its members.
Source:ECB
Payment System (2)
• The set of instruments, banking procedures and interbank funds transfer systems which facilitate the circulation of money in a country or currency area.
Source: ECB
Payment Chain
buyer seller
good/service
debit paymentinstruction
bank bank
paymentinstruction
debit credit
creditpaymentinformation
paymentinformation
clearing
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
Payments Pyramid - Eurosystem
0
20
40
60
80
100
120
Equens
RPS
BI-COM
SIT
OTHER
0
500
1.000
1.500
2.000
2.500
3.000
3.500
TARGET2
Euro1
PNS
Average daily number of transactions (millions)
Average daily value of transactions (EUR billions)
Wholesale PSSource: ECB
Retail PS
Wholesale PS Retail PS
Wholesale: 0,6% in terms of number…..
…..but 97,7% in terms of value
1
10
100
1.000
10.000
1 10 100 1.000 10.000 100.000
Payments Pyramid - Eurosystem
TARGET2
EURO1
SNCE
SICOI
EQUENS
SIT
Distribution of payment systems
Wholesale PS
Retail PS
billions
thousands
Large Value Payment Systems
International comparison- Value of transactions (EUR Billions)
0
100.000
200.000
300.000
400.000
500.000
600.000
700.000
800.000
2004 2005 2006 2007 2008
CHAPS Euro
BOJ-NET
CHIPS
Fedwire
CLS
TARGET
EURO1
Bron: BIS
Wholesale Payments
DNS: Deferred Net Settlement (nettting)•Multilateral, usually at the end of the day
RTGS: Real Time Gross Settlement•continuous (real-time) settlement of funds transfers individually on an order-by-order basis
Hybride Systems
Wholesale Payments
TRENDS/ISSUES Liquidity management
•Real time settlement → higher demands on liquidity management
•TARGET2: range of tools to control, monitor and manage liquidity
Operational resilience and business continuity management as a result of global interdependencies.
Trends in Retail Payments in the EU
Source: ECB
Payment transactions in the euro area (billions)
0
2
4
6
8
10
12
14
16
18
20
22
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
debit and credit cards
credit transfers
direct debits
cheques
E-money purchases
Issues in Retail Payments
Efficiency Security More Electronification and less paper based:
Internet banking and card payments Innovations: products and markets Political influence, legislation and standards Business models –interchange fees
Securities Chain
trading
clearing
settlement
Agreement to exchange securities for funds
Calculation of obligations
Delivery of securities and payment of funds
Securities Settlement Systems
LVPS
CSD
BANK A BANK B
A system which allows the transfer of securities,either free of payment (FOP) or against payment (delivery versus payment)
Source: ECB
Securities Settlement Systems
Trends/Issues
• Settlement risks (DVP)• Securities Legislation: MiFID etc.• Multiple platforms • Cross border links (global interdependencies)• Settlement of derivatives: role for CCPs
Financial Crisis
Key words: EXCESSIVE OPTIMISM
EXCESSIVE RISK APPETITE
ASPECTS Relative Stability (the great moderation, Bernanke) Search for Yield Easing Criteria for Credit (subprime, alt-a etc) Innovations (originate-to-distribute model, monoliners etc)
FINANCIAL CRISIS
15 september 2008
Lehman Brothers †
Trigger of severe loss of confidence,wave of contagion
FINANCIAL CRISIS
Crisis Management•Provision Liquidity •Nationalizations•Savings Guarantee •Capital Injections & Debt Guarantees• Interest rates ↓
In order toUNDERPIN CONFIDENCE
PSSS functioned quite well
FINANCIAL CRISIS
What´s Next? Credit crunch Stock Markets Banking Sector Insurance sector House prices Pension funds
World recession Protection Greece/country risks Euro?
Recommendations of Financial Stability Forum
Improve Risk Management Enlarge Transparency Further Cooperation between Public Authorities Reform supervision Improve Crisis Management
NSCC
Clearnet
LondonClearingHouse
CDiCG
CCAS
JSCC
Austraclear
Euroclear
SIS
CREST
Clearstream
SCLV
Monte Titoli
OM-VPC
VPS
VP
HKSCCJasDec
Chess
CDP
CDS
CHAPS
FedWire
SIC
ELLIPSTBF/ TOP
BI REL
SLBE
LVTS
RTGSPLUS
LIPS-Gross
MEPS
BoJ-NetRITS RTGS
CLS Bank
DEBES
E/ K RIX
BoF-RTGS
APK
SWIFT-RTGS
ARTIS
OeKB
HERMES
BOGS/ CSD
SPGT
SITEMEInterbolsa
EuroCCP
DTC
CCPs
CSDs
RTGS
CLS
TARGET
CSD Links
2nd wave CLS currency
Payments and Securities Infrastructure
WEB OF GLOBAL INTERDEPENDENCIES
(LVPSs, CCPs, CSDs, Banks)
WITH TIGHT DEADLINES
(RTGS, DVP, PVP)
Key words
● Technological developments
● Globalization
● Consolidation in financial sectorSource: BIS, The Interdependencies of payment and settlement
systems 2008
CPSS REPORT ON INTERDEPENDENCIES
Figure 6: Profile of Institutions’ Activities and Access Choices, 2006(by country, with number of financial institutions* in parentheses)
Very Significant
InternationalSettlement
Activity
CH (1)FR (1)JP (1)US (1)
DE (1)NL (1) UK (1)US (1)
Significant InternationalSettlement
Activity
CH (1)NL (1)
IT (1) FR (2)JP (1)
UK (1)
Moderate InternationalSettlement
Activity
BE (2)IT (2)JP (1)NL (1)SG (1)US (3)
CA (5)DE (2)FR (1)SE (3) UK (1)
DE (1)JP (1)UK (1)
Mixed Approach: Significant self-clearing in multiple currency zones,
but moderate levels of direct participation
Primary reliance oncorrespondentsand custodiansbeyond home
currency; direct participation in CLS
and one or more ICSDs
Domestic, plus one or two of: EUR, USD, or
YEN
Domestic, plus more than threeCPSS currencies
Significant self-clearing in most
CPSS currencies, and
beyond
* At the highest holding company level
Figure 6: Profile of Institutions’ Activities and Access Choices, 2006(by country, with number of financial institutions* in parentheses)
Very Significant
InternationalSettlement
Activity
CH (1)FR (1)JP (1)US (1)
DE (1)NL (1) UK (1)US (1)
Significant InternationalSettlement
Activity
CH (1)NL (1)
IT (1) FR (2)JP (1)
UK (1)
Moderate InternationalSettlement
Activity
BE (2)IT (2)JP (1)NL (1)SG (1)US (3)
CA (5)DE (2)FR (1)SE (3) UK (1)
DE (1)JP (1)UK (1)
Mixed Approach: Significant self-clearing in multiple currency zones,
but moderate levels of direct participation
Primary reliance oncorrespondentsand custodiansbeyond home
currency; direct participation in CLS
and one or more ICSDs
Domestic, plus one or two of: EUR, USD, or
YEN
Domestic, plus more than threeCPSS currencies
Significant self-clearing in most
CPSS currencies, and
beyond
* At the highest holding company level
Figure 6: Profile of Institutions’ Activities and Access Choices, 2006(by country, with number of financial institutions* in parentheses)
Very Significant
InternationalSettlement
Activity
CH (1)FR (1)JP (1)US (1)
DE (1)NL (1) UK (1)US (1)
Significant InternationalSettlement
Activity
CH (1)NL (1)
IT (1) FR (2)JP (1)
UK (1)
Moderate InternationalSettlement
Activity
BE (2)IT (2)JP (1)NL (1)SG (1)US (3)
CA (5)DE (2)FR (1)SE (3) UK (1)
DE (1)JP (1)UK (1)
Mixed Approach: Significant self-clearing in multiple currency zones,
but moderate levels of direct participation
Primary reliance oncorrespondentsand custodiansbeyond home
currency; direct participation in CLS
and one or more ICSDs
Domestic, plus one or two of: EUR, USD, or
YEN
Domestic, plus more than threeCPSS currencies
Significant self-clearing in most
CPSS currencies, and
beyond
* At the highest holding company level
Financial European integration – why?
Euro Area: 17 National Markets
Limitations on Competition
Diseconomies of Scale
Inefficiencies with reference to 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
Guidelines for payment system development
The role of the banking sector Effective planning and project implementation Developing the institutional framework Designing a safe and efficient payment
infrastructure
Source: Report of BIS-CPSS, General guidance for payment system development, 2005
Dutch National Forum on the Payment System
Objective: contributing to an efficient organisation of the Dutch retail payment system from a social point of view
Isues regarding• Efficiency• Security• Technological developments• Reachability & Accessibility
Results of the Dutch National Forum
• Rounding-off to nearest 5 cents• Joint information brochures• Report on availability of banking services• Guideline for user-friendly EFTPOS terminals• Support for National SEPA Migration Plan• Warning for security risks overlay services• A lot of research with regard to efficiency,
accessibility and security of payment instruments
Discussion points
• What are recent changes in your country with respect to payments and securities settlement systems?
• How does your central bank fill in the different roles in PSSS?
• Do you agree with the need of bringing together stakeholders for the development of payment and securities settlement system? How do you organise this?