14 Consensus and Direction for Future Policy Analysis

Omotunde Johnson, Jean-Marc Destresse, Nicholas Roberts, Mark Swinburne, Tonny Lybek, and Richard Abrams
Published Date:
March 1998
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Payment systems have become an important focus of public policy worldwide in recent years, and central banks have been given a major role in this area because of their responsibilities for financial sector stability. Central banks, in turn, have increasingly come to recognize the payment system as a potential transmission mechanism for, if not an original source of, systemic financial crises—cross-border as well as domestic—with very large related risks for central banks, commercial banks, and national budgetary resources. Also of concern to central banks are the implications for monetary policy of payment system developments and efficiency at a broad social level as well as at the operational level (related to customer service, for example). Motivated by the desire to enhance the effectiveness of monetary policy, central banks typically seek to promote financial market development, which in turn is facilitated by reform in the payment system. As the payment system itself develops, the obligation of the authorities to ensure a sound and competitive financial system leads them to focus on reducing risk and on fostering efficiency in the payment system.

Thus central banks play a leadership role in payment systems (the exact details of which vary from country to country) by owning and administering clearing and settlement systems (particularly large-value systems) and by taking steps to ensure timely settlement of payments and designing policies and procedures to contain systemic risks. The motivating forces for this leadership role reflect monetary and prudential management responsibilities of the central banks: (1) banks, which central banks transact with and often supervise, are important providers of payment services—in addition to their role in financial intermediation—and hence are susceptible to systemic risks in the payment system; (2) central bank money is crucial in the final settlement of claims in money markets; and (3) the central bank has quite often been delegated (usually by legislation) the task of representing the public interest in ensuring an institutional and organizational environment that fosters efficient resource use in the payment system and the efficient development of payment services.

Several factors—including the globalization of economies, the collapse of the regime of fixed exchange rates, the liberalization of capital movements, the demand for portfolio diversification, and the decrease in the costs of transactions—have provoked a considerable increase in the volume and value of cross-border flows over the past two decades. In the industrial countries domestic payment systems have steadily evolved in reaction to increasing volumes of transactions, technological progress, and a growing awareness of the public authorities and the private sector of the risks inherent in clearing and settlement arrangements. But a similar evolution has not occurred in cross-border payment systems, which have continued for years to rely essentially on traditional correspondent banking arrangements despite a considerable increase in the volume and value of transactions. This situation is changing now, with the development of various private initiatives, and the growing involvement of the supervisory authorities in this area. Cross-border payments in the future will probably be processed more and more through institutionalized private or public clearing and settlement arrangements linked to more and more harmonized domestic payment systems.

In payment system policy, one finds areas in which a general consensus has emerged and aspects in which countries have different practices. In addition, for many payment system issues there still remains a need for continued intensive research and debate. In general, the actual practices of countries in the payment area have reflected, inter alia, their history, structural aspects of their economies—especially banking and financial structure—and their community values, as evidenced, for example, by approaches toward the role of government and of the central bank in the economy and toward competition policy.

Among the areas of consensus, the following can be noted:

  • settlement in the books of the central bank for interbank clearing and large-value transfer systems (rather than in the books of some private clearing bank);
  • real-time gross settlement (RTGS) systems as the preferred choice on prudential grounds for large-value transfer systems operated by the central bank;
  • full cost pricing for payment services provided by the central bank whenever it is cost-effective to construct such price schedules;
  • careful cost-benefit analyses focusing especially on user requirements (effective demand) when major central bank or public sector initiatives are launched in the payment system;
  • same-day settlement for all funds transfer systems for domestic transactions;
  • having in place arrangements to ensure settlement finality, without central bank intervention, in interbank (especially large-value) private transfer systems;
  • zero payment system float as an ideal goal that should be approached as socially efficient devices can be found to effect farther reductions of such float from existing levels;
  • payment on delivery in securities transactions (delivery-versus-payment—DVP—systems);
  • simultaneous final settlement of the two legs of a foreign exchange transaction (payment versus payment) as a desirable goal in order to contain Herstatt risk; and
  • international coordination of payment system policy as potentially welfare-enhancing for individual countries, especially in areas such as the legal framework, risk-management policies in clearing and settlement systems, business hours, and certain standards and infrastructure.

Significant differences in country practices continue to exist in several aspects, including (1) the role of the central bank in clearing and processing of payments; (2) whether the central bank should grant daylight overdraft for RTGS systems (and if it does, how to price it) and whether such overdraft should be partial or fully collateralized; (3) the role of the central bank in guaranteeing payment finality, especially of large-value payments and, related to this, the regulatory and other policies of the central bank to contain its credit risks and to ensure effectiveness of its monetary management; and (4) the extent to which standardization (formats, documents, technology, banking hours, and so forth) should be imposed by the central bank or public sector or left to evolve by agreement among the agents in the private sector.

Among the issues that remain at the forefront for future intensive policy analysis, a few can be mentioned:

  • the measurement of systemic risks;
  • the optimal pricing for credit risks in central bank lending, especially intraday;
  • the effects of fees and caps on daylight overdrafts;
  • assessing the optimality of queuing arrangements;
  • the effect of payment system development and arrangements on the demand for international liquidity;
  • the impact of daylight overdrafts on interest rates and the price level;
  • the possible role of the central bank in the development of private intraday markets;
  • measuring the effects on the demand for money of new payment instruments (for example, stored-value cards);
  • estimating the social cost of float; and
  • the optimal policy mix for appropriate internalization of the costs of float and of the costs and benefits of augmenting operational reliability.

In underpinning support of core central banking reforms in monetary, exchange, and prudential management, a wide range of policy and general design issues in payment systems have been addressed in IMF technical assistance. The thrust of Fund advice is to encourage member countries to move, taking into account considerations of economic efficiency, toward norms and best practices for payment systems—including their regulation—on which a broad consensus has emerged in industrial countries. The IMF has played this role in the context of its technical assistance to support structural reforms (in central banking and related financial sector areas), surveillance and use of IMF resources, and its research activities. Although technical assistance has covered all aspects of payment system reform, increasingly the IMF is likely to concentrate on policy and strategic aspects of key interest to central banks, leaving nuts and bolts and project implementation tasks to other agencies such as the World Bank and other multilateral and bilateral providers of technical assistance.

As well as providing technical assistance, the IMF is increasingly concerned with payment system issues in the context of surveillance and use of IMF resources. Of special consideration is that financial risk management in payment systems is a component of banking soundness and stability, with implications for macroeconomic stability and, hence, benefits from monitoring in the context of country surveillance work. In that regard, the proposed intensification of the IMF’s work in banking and financial sector surveillance activities will require, both at a country level and globally, that attention be given to the prudential supervision and monetary management implications of payment system development as an important facet of the soundness and stability of banking systems.

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