De Nederlandsche Bank GENERAL FRAMEWORK AND OVERVIEW Carlo
De Nederlandsche Bank GENERAL FRAMEWORK AND OVERVIEW Carlo Winder Conference Financial Sector of Macedonia on Payments and Securities Settlement Systems Ohrid 23 June 2008 De Nederlandsche Bank Eurosysteem
Agenda l Definitions and Concepts l Role of central banks l International developments De Nederlandsche Bank Eurosysteem
Role of central banks IT´S ALL ABOUT FINANCIAL STABILITY De Nederlandsche Bank Eurosysteem
Role of central banks SCOPE MONETARY STABILITY: stable currency l FINANCIAL SECTOR STABILITY: reliable financial institutions l PAYMENT SYSTEM: smooth and secure payments l De Nederlandsche Bank Eurosysteem
Mission of the central bank De Nederlandsche Bank Safeguarding the stability of the financial system and the institutions that are part of it, by l contributing to the monetary policy of the Eurosystem l supervising the financial soundness and integrity of financial institutions l promoting the smooth functioning of the payments system De Nederlandsche Bank Eurosysteem
Payment systems policy OBJECTIVES MAIN GOAL l to promote safe and efficient payment and settlement systems Other goals (central bank specific) l e. g. crime prevention, effective competition, consumer protection, accessibility De Nederlandsche Bank Eurosysteem
Payment system is all about trust. . . l l l Trust Trust Currency Issuer Payment system Authenticity Constitutional state De Nederlandsche Bank Eurosysteem
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) De Nederlandsche Bank Eurosysteem
Payment chain CENTRAL BANK payment instruction debit bank debit payment information credit bank payment information credit payment instruction seller buyer De Nederlandsche Bank good/service Eurosysteem
Payment chain CENTRAL BANK debit credit payment instruction payment information ACH bank CLEARING debit payment information credit payment instruction seller buyer De Nederlandsche Bank Eurosysteem good/service
Payment chain CENTRAL BANK bank RETAIL PAYMENTS buyer seller De Nederlandsche Bank Eurosysteem
Payment chain CENTRAL BANK WHOLESALE PAYMENTS bank buyer bank seller De Nederlandsche Bank Eurosysteem
Payment Pyramid - Eurosystem De Nederlandsche Bank Eurosysteem
Payment Pyramid - Eurosystem De Nederlandsche Bank Eurosysteem
Retail versus wholesale payments Low value ↔ Large value High volume ↔ Low volume Consumers and businesses ↔ Financial institutions Time less important ↔ Time critical Low systemic risk ↔ High systemic risk De Nederlandsche Bank Eurosysteem
RETAIL PAYMENTS TRENDS/ISSUES ● growth of card payments ● costs of payments ● interchange fees ● innovations De Nederlandsche Bank Eurosysteem
GROWTH OF CARDS PAYMENTS De Nederlandsche Bank Eurosysteem
COSTS OF PAYMENTS World Retail Banking Report 2005 De Nederlandsche Bank Eurosysteem
Interchange Fees Gresham´s law of payments Traditionally: Bad currency drives out the good High-cost payment instruments drive out low cost ones De Nederlandsche Bank Eurosysteem
STRUCTURE OF CARD PAYMENT Interchange Fee Bank A issuer Bank B acquirer Merchant Fee consumer goods retailer De Nederlandsche Bank Eurosysteem
Gresham´s law of payments UNITED STATES Competition between credit card schemes higher prices because of interchange fees De Nederlandsche Bank Eurosysteem
Innovations EXAMPLES • internet banking, on line banking • biometric identification • contactless cards De Nederlandsche Bank Eurosysteem
WHOLESALE PAYMENTS DNS: Deferred Net Settlement l Multilateral, usually at the end of the day RTGS: Real Time Gross Settlement l continuous (real-time) settlement of funds transfers individually on an order-by-order basis De Nederlandsche Bank Eurosysteem
WHOLESALE PAYMENTS TRENDS/ISSUES ● Liquidity management ü Real time settlement → higer demands on liquidity management ü T 2: range of tools to control, monitor and manage liquidity ● Operational resilience, e. g. as a result of global interdependencies De Nederlandsche Bank Eurosysteem
Securities Settlement Systems A typical settlement transaction has l Cash Leg l Securities Leg and involves l CSD: Central Securities Depository l LVPS: Large Value Payment System l CCP: Central Counterparty De Nederlandsche Bank Eurosysteem
Securities Settlement Systems LVPS BANK A BANK B CSD De Nederlandsche Bank Eurosysteem
Interfaced / Integrated Model Interfaced l CSD has the securities account, CB the cash account. Communication through an interface Integrated l CB or CSD operates both the cash and securities account, e. g. Ø CB outsources cash settlement Ø CB insources securities settlement De Nederlandsche Bank Eurosysteem
Securities Settlement Systems LVPS BANK A CCP BANK B CSD De Nederlandsche Bank Eurosysteem
Securities Settlement Systems CSDs l settlement of securities transactions l depository of securities l corporate actions CCPs l buyer to the seller l seller to the buyer l often uses multilateral netting (clearing) l contributes to efficiency, mitigates risk De Nederlandsche Bank Eurosysteem
Securities Settlement Systems TRENDS/ISSUES l l l Settlement risks (DVP) Multiple platforms Cross border links (global interdependencies) De Nederlandsche Bank Eurosysteem
Large Value Payment Systems De Nederlandsche Bank Eurosysteem
CLS CLS: Continuous Linked Settlement ● FX Risks ● basically a ´guaranteed refund´ scheme, i. e. you will either receive the correct currency or a refund De Nederlandsche Bank Eurosysteem
Traditional cross border transaction NCB B NCB A D BANK A 1 BANK A 2 BANK B 1 BANK B 2 C De Nederlandsche Bank Eurosysteem
Correspondent banking: FX transaction A: Japanse correspondent Yen B: Japanse correspondent Japanese payment system Bank 1 Bank 2 US payment system A: US correspondent US$ B: US correspondent De Nederlandsche Bank Eurosysteem
Continuous Linked Settlement CLS Bank De Nederlandsche Bank Eurosysteem
FX transaction, via CLS Bank A A: Settlement member CLS BANK A: Settlement member Yen B: Settlement member Bank B B: Settlement member US $ De Nederlandsche Bank Eurosysteem
POLICY OBJECTIVES OF CENTRAL BANK MAIN GOAL promote safe and efficient payment and settlement systems De Nederlandsche Bank Eurosysteem
How to Achieve Policy Objectives? l OPERATIONS l OVERSIGHT l CATALYST De Nederlandsche Bank Eurosysteem
Operational role central bank Issuance and distribution of cash l Operator large value transfer system l Settlement services retail transactions l Cash settlement securities transactions l Clearing services retail payments l Operator securities settlement system l Other securities related services l Public sector payments l De Nederlandsche Bank Eurosysteem
Oversight l ‘a public policy activity focused on the safety and efficiency of systems, in particular to reduce systemic risk’. De Nederlandsche Bank Eurosysteem
Oversight Scope central bank oversight varies: l just systemically important systems, including securities settlement systems l including retail systems l Including payment instruments De Nederlandsche Bank Eurosysteem
Catalyst Case for intervention, but not necessarily regulation or operations ‘Third way’ - ‘guide’ the market, by promoting initiatives and co-operation l between stakeholders l between other public authorities, e. g. - Government Competition authorities De Nederlandsche Bank Eurosysteem
Minimal role Large value Retail Securities settlement Operations Oversight Catalyst De Nederlandsche Bank Eurosysteem
Emphasis on oversight (e. g. DNB) Large value Retail Securities settlement Operations Oversight Catalyst De Nederlandsche Bank Eurosysteem
Emphasis on operations (e. g. Fed) Large value Retail Securities settlement Operations Oversight Catalyst De Nederlandsche Bank Eurosysteem
International developments KEY WORDS l l Globalization Consolidation Financial Sector NEED FOR FURTHER COOPERATION l National Ø Supervisors Ø Competition Authorities Ø Government ● International l De Nederlandsche Bank Eurosysteem
International cooperation Bank of International Settlements Main Committees l BCBS (Bazel Committee of Banking Supervisors) l CPSS (Committee on Payment and Securities Settlement) l CGFS (Committee on Global Financial Stability) l Irving Fisher Committee on Central Bank Statistics De Nederlandsche Bank Eurosysteem
De Nederlandsche Bank Eurosysteem
Financial European integration – why? l EURO AREA: 13 National Markets l Limitations on Competition l Diseconomies of Scale l Inefficiencies wrt cross-border flows of money, securities and collateral De Nederlandsche Bank Eurosysteem
Financial European integration – how? 1. 2. 3. INSTITUTIONAL ARRANGEMENTS FINANCIAL MARKETS INFRASTRUCTURES →payment and securities settlement systems INFRASTRUCTURES l Essential for Financial Stability l Central Banks Play Key Role De Nederlandsche Bank Eurosysteem
Financial European integration – how? EURO AREA PROJECTS TARGET 2 l TARGET 2 Securities l CCBM 2 l SEPA l SECA l De Nederlandsche Bank Eurosysteem
THNX De Nederlandsche Bank Eurosysteem
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