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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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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
Knowledge is power! • Sir Francis Bacon, Religious Meditations, Of Heresies, 1597
Agenda • Definitions and Roles of Central Banks in Payments Systems • Financial crisis • Global developments
Agenda • FINANCIAL CRISIS • PAYMENTS SYSTEMS • CPSS Report on System Interdependencies • Liquidity Issues • TARGET 2
Role of central banks IT´S ALL ABOUT FINANCIAL STABILITY
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 GOAL • to promote safe and efficient payment and settlement systems Other goals: central bank specific • e.g. crime prevention, effective competition, consumer protection, accessibility
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)
Payment chain debit credit payment instruction payment information bank bank clearing payment information credit debit payment instruction seller buyer good/service
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
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
How to Achieve Policy Objectives? • OPERATIONS • OVERSIGHT • CATALYST
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
Oversight • ‘a central bank activity focused on the safety and efficiency of payment and securities settlement systems, in particular to reduce systemic risk’.
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
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 SOURCES ● US Housing Market GLOBAL CONTAGION OF markets and financial institutions Unprecedented: scale and scope of contagion
FINANCIAL CRISIS Crisis comes in waves
FINANCIAL CRISIS 15 september 2008 Lehman Brothers † Trigger of severe loss of confidence, wave of contagion
FINANCIAL CRISIS First, liquidity problems but also solvency problems
FINANCIAL CRISIS What´s Next? Credit crunch • Stock Markets • Banking Sector • Insurance sector • House prices • Pension funds • World recession • Protection
FINANCIAL CRISIS CRISIS MANAGEMENT • Provision Liquidity • Nationalizations • Savings Guarantee • Capital Injections & Debt Guarantees • Interest rates ↓ In order to UNDERPIN CONFIDENCE
FINANCIAL CRISIS Other Crises • Great Depression (1929-1930) • Savings and Loan Crisis (US,1984) • Japan (1984) • Sweden (1991)
FINANCIAL CRISIS Differences with Great Depression • Many (regional) banks had no access to Fed money • No Savings Guarantee System • National Protectionism • Tight monetary policy
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´?
FINANCIAL CRISIS – FUTURE Recommendations of Financial Stability Forum Improve Risk Management Enlarge Transparency Further Cooperation between Public Authorities Reform supervision Improve Crisis Management
RISK MANAGEMENT USED TO BE SMART
Crisis: Payments Systems Angle STYLIZED FACT: Scale and Scope of Contagion We live in global village
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
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
FINANCIAL CRISIS FURTHER ISSUES • Assess BCP arrangements: scope and scale of contagion, cross-border • Cross-border Collateral: ELA facilities • Growth and Quality of Collateral
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
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
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$
CLS Bank Continuous Linked Settlement CLS
Yen A: Settlement member B: Settlement member Bank A Bank B CLS BANK A: Settlement member B: Settlement member US $ FX transaction, via CLS
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
NCB B NCB A NCB A BANK B1 C D D BANK B2 BANKA1 BANK A2 Correspondent Banking
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
Correspondent Banking Risks for Bank A1 • Bankruptcy Bank B1 • Impossibility to use credit lines with Bank B1 • Operational outage at Bank B1