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GENERAL FRAMEWORK AND OVERVIEW Carlo Winder

De Nederlandsche Bank. GENERAL FRAMEWORK AND OVERVIEW Carlo Winder Conference Financial Sector of Macedonia on Payments and Securities Settlement Systems Ohrid 23 June 2008. Agenda. Definitions and Concepts Role of central banks International developments. Role of central banks.

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GENERAL FRAMEWORK AND OVERVIEW Carlo Winder

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  1. De Nederlandsche Bank GENERAL FRAMEWORK AND OVERVIEW Carlo Winder Conference Financial Sector of Macedonia on Payments and Securities Settlement Systems Ohrid 23 June 2008

  2. Agenda • Definitions and Concepts • Role of central banks • International developments

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

  4. Role of central banks SCOPE • MONETARY STABILITY: stable currency • FINANCIAL SECTOR STABILITY: reliable financial institutions • PAYMENT SYSTEM: smooth and secure payments

  5. 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

  6. 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

  7. Payment system is all about trust... • Trust • Trust • Trust • Trust • Trust Currency Issuer Payment system Authenticity Constitutional state Trust

  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. CENTRAL BANK payment information payment instruction debit credit bank bank payment information credit debit payment instruction seller buyer good/service Payment chain

  10. CENTRAL BANK debit credit payment instruction payment information ACH bank bank CLEARING payment information credit debit payment instruction seller buyer good/service Payment chain

  11. Payment chain CENTRAL BANK bank bank RETAIL PAYMENTS seller buyer

  12. Payment chain CENTRAL BANK WHOLESALE PAYMENTS bank bank bank bank buyer seller

  13. Payment Pyramid - Eurosystem

  14. Payment Pyramid - Eurosystem

  15. 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

  16. RETAIL PAYMENTS TRENDS/ISSUES ● growth of card payments ● costs of payments ● interchange fees ● innovations

  17. GROWTH OF CARDS PAYMENTS

  18. COSTS OF PAYMENTS World Retail Banking Report 2005

  19. Interchange Fees Gresham´s law of payments Traditionally: Bad currency drives out the good High-cost payment instruments drive out low cost ones

  20. STRUCTURE OF CARD PAYMENT Interchange Fee Bank A issuer Bank B acquirer Merchant Fee consumer retailer goods

  21. Gresham´s law of payments UNITED STATES Competition between credit card schemes  higher prices because of interchange fees

  22. Innovations • EXAMPLES • internet banking, on line banking • biometric identification • contactless cards

  23. WHOLESALE PAYMENTS DNS: Deferred Net Settlement • 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

  24. 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

  25. Securities Settlement Systems A typical settlement transaction has • Cash Leg • Securities Leg and involves • CSD: Central Securities Depository • LVPS: Large Value Payment System • CCP: Central Counterparty

  26. LVPS BANK A BANK B CSD Securities Settlement Systems

  27. Interfaced / Integrated Model Interfaced • CSD has the securities account, CB the cash account. Communication through an interface Integrated • CB or CSD operates both the cash and securities account, e.g. • CB outsources cash settlement • CB insources securities settlement

  28. LVPS BANK A BANK B CCP CSD Securities Settlement Systems

  29. Securities Settlement Systems 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

  30. Securities Settlement Systems TRENDS/ISSUES • Settlement risks (DVP) • Multiple platforms • Cross border links (global interdependencies)

  31. Large Value Payment Systems

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

  33. NCB B NCB A NCB A BANK B1 C D D BANK B2 BANKA1 BANK A2 Traditional cross border transaction

  34. 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$

  35. CLS Bank Continuous Linked Settlement CLS

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

  37. POLICY OBJECTIVES OF CENTRAL BANK MAIN GOAL promote safe and efficient payment and settlement systems

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

  39. 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

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

  41. Oversight Scope central bank oversight varies: • just systemically important systems, including securities settlement systems • including retail systems • Including payment instruments

  42. 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

  43. Minimal role Large value Retail Securities settlement Operations Oversight Catalyst

  44. Emphasis on oversight (e.g. DNB) Large value Retail Securities settlement Operations Oversight Catalyst

  45. Emphasis on operations (e.g. Fed) Large value Retail Securities settlement Operations Oversight Catalyst

  46. International developments KEY WORDS • Globalization • Consolidation Financial Sector • NEED FOR FURTHER COOPERATION • National • Supervisors • Competition Authorities • Government ● International

  47. International cooperation Bank of International Settlements Main Committees • BCBS (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

  48. 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

  49. Financial European integration – how? • INSTITUTIONAL ARRANGEMENTS • FINANCIAL MARKETS • INFRASTRUCTURES →payment and securities settlement systems INFRASTRUCTURES • Essential for Financial Stability • Central Banks Play Key Role

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