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Financial crisis and Global Developments Michael van Doeveren

This conference presentation discusses the role of central banks in payment systems, the financial crisis and its global impact, and the importance of payment systems in facilitating monetary policy and promoting financial stability. The text language is English.

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Financial crisis and Global Developments Michael van Doeveren

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  1. De Nederlandsche Bank Financial crisis and Global Developments Michael van Doeveren 3rd Conference of the Macedonian Financial sector on Payments and Securities settlement Systems Ohrid 28 June 2010

  2. Knowledge is power! • Sir Francis Bacon, Religious Meditations, Of Heresies, 1597

  3. Agenda • Definitions and Roles of Central Banks in Payments Systems • Financial crisis • Global developments

  4. Agenda • FINANCIAL CRISIS • PAYMENTS SYSTEMS • CPSS Report on System Interdependencies • Liquidity Issues • TARGET 2

  5. Role of central banks IT´S ALL ABOUT FINANCIAL STABILITY

  6. 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

  7. Payment systems policy OBJECTIVES MAIN GOAL • to promote safe and efficient payment and settlement systems Other goals: central bank specific • e.g. crime prevention, effective competition, consumer protection, accessibility

  8. 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)

  9. Payment chain debit credit payment instruction payment information bank bank clearing payment information credit debit payment instruction seller buyer good/service

  10. 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

  11. Payment Pyramid - Eurosystem Wholesale: 0,6% in terms of number….. Average daily value of transactions (EUR billions) Average daily number of transactions (millions) Wholesale PS Retail PS …..but 97,7% in terms of value Wholesale PS Retail PS

  12. How to Achieve Policy Objectives? • OPERATIONS • OVERSIGHT • CATALYST

  13. Operational role central bank • Issuance and distribution of cash • Operator large value transfer system • Settlement services retail transactions • Cash settlement securities transactions • Clearing services retail payments • Operator securities settlement system • Other securities related services • Public sector payments

  14. Oversight • ‘a central bank activity focused on the safety and efficiency of payment and securities settlement systems, in particular to reduce systemic risk’.

  15. Catalyst Case for intervention, but not necessarily regulation or operations  ‘Third way’ - ‘guide’ the market, by promoting initiatives and co-operation • between stakeholders • between other public authorities, e.g. • Government • Competition authorities

  16. 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)

  17. FINANCIAL CRISIS SOURCES ● US Housing Market  GLOBAL CONTAGION OF markets and financial institutions Unprecedented: scale and scope of contagion

  18. FINANCIAL CRISIS Crisis comes in waves

  19. FINANCIAL CRISIS 15 september 2008 Lehman Brothers † Trigger of severe loss of confidence, wave of contagion

  20. FINANCIAL CRISIS First, liquidity problems but also solvency problems

  21. FINANCIAL CRISIS What´s Next? Credit crunch • Stock Markets • Banking Sector • Insurance sector • House prices • Pension funds • World recession • Protection

  22. FINANCIAL CRISIS CRISIS MANAGEMENT • Provision Liquidity • Nationalizations • Savings Guarantee • Capital Injections & Debt Guarantees • Interest rates ↓ In order to UNDERPIN CONFIDENCE

  23. FINANCIAL CRISIS Other Crises • Great Depression (1929-1930) • Savings and Loan Crisis (US,1984) • Japan (1984) • Sweden (1991)

  24. FINANCIAL CRISIS Differences with Great Depression • Many (regional) banks had no access to Fed money • No Savings Guarantee System • National Protectionism • Tight monetary policy

  25. FINANCIAL CRISIS 2009-2010: NEXT WAVE of Crisis: RECESSION Issues: • Credit Crunch: dilemma for banks • Avoid beggar-thy-neighbour policy • How to restore confidence? • Crisis is worldwide • Establishment of ´bad banks´?

  26. FINANCIAL CRISIS – FUTURE Recommendations of Financial Stability Forum Improve Risk Management Enlarge Transparency Further Cooperation between Public Authorities Reform supervision Improve Crisis Management

  27. RISK MANAGEMENT USED TO BE SMART

  28. Crisis: Payments Systems Angle STYLIZED FACT: Scale and Scope of Contagion We live in global village

  29. 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 sector

  30. CPSS REPORT ON INTERDEPENDENCIES

  31. FINANCIAL CRISIS No Crisis of P&SS Infrastructure BUT it may have an infrastructural impact, e.g. Need for further standardization (operating rules,legal devices etc)? • US: intraday credit policy • UK: highly tiered structure of CHAPS

  32. FINANCIAL CRISIS FURTHER ISSUES • Assess BCP arrangements: scope and scale of contagion, cross-border • Cross-border Collateral: ELA facilities • Growth and Quality of Collateral

  33. FINANCIAL CRISIS COOPERATION WITH SUPERVISORS (domestic and cross-border) • FX Settlement Risk: use of CLS • Correspondent banking: risk management • Update Sound Practices on Liquidity Management: intraday liquidity

  34. FX Settlement Risk – Continuous Linked Settelement CLS: Continuous Linked Settlement ● FX Risks ● basically a ´guaranteed refund´ scheme, i.e. you will either receive the correct currency or a refund

  35. Correspondent banking: FX transaction B: Japanse correspondent A: Japanse correspondent Yen Japanese payment system Bank 1 Bank 2 US payment system A: US correspondent B: US correspondent US$

  36. CLS Bank Continuous Linked Settlement CLS

  37. Yen A: Settlement member B: Settlement member Bank A Bank B CLS BANK A: Settlement member B: Settlement member US $ FX transaction, via CLS

  38. FX Settlement Risk CPSS Report 2008 Progress in reducing foreign exchange settlement risk ● major reduction of FX settlement exposures ● 45% of total obligations are settled via corresponding banking channel ● risk exposures are underestimated

  39. NCB B NCB A NCB A BANK B1 C D D BANK B2 BANKA1 BANK A2 Correspondent Banking

  40. Correspondent Banking Risks for Bank B1 • Bank A1 fails on its obligations with reference to intraday credit • Bank A1 uses scarce liquidity • Bank A1 has operational problems

  41. Correspondent Banking Risks for Bank A1 • Bankruptcy Bank B1 • Impossibility to use credit lines with Bank B1 • Operational outage at Bank B1

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