Abstract

Dedicated to the Memory of Jean-Marc Destresse

Dedicated to the Memory of Jean-Marc Destresse

Titlepage

Payment Systems, Monetary Policy, and the Role of the Central Bank

Omotunde E.G. Johnson

with Richard K Abrams

Jean-Marc Destresse

Tonny Lybek

Nicholas M. Roberts

Mark Swinburne

International Monetary Fund

Copyright

© 1998 International Monetary Fund

Cover design, charts, and composition:

Phil Torsani, In-Ok Yoon, Choon Lee, and IMF Graphics Section

Library of Congress Cataloging-in-Publication Data

Payment systems, monetary policy, and the role of the central bank / Omotunde E.G. Johnson with Richard K. Abrams … [et al.],

  • p. cm.

Includes bibliographical references.

ISBN 1-55775-626-0

1. Payment—Case studies. 2. Clearinghouses (Banking)—Case studies. 3. Monetary policy—Case studies. 4. Banks and banking, Central—

Case studies. I. Johnson, Omotunde E.G.

HG1692.P388 1997

332′.0285—dc21

97-3846

CIP

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Foreword

Integration of financial markets, marked growth in private capital flows, and economic globalization have convinced country authorities of the need for enhanced operational efficiency, reliability, speed, and timeliness of payment transactions, as well as the need for sustained vigilance to reduce or contain financial risks in their national payment systems. At the core of this process are central banks, which typically have legal obligations not only to keep inflation under control but also to foster the stability and soundness of the financial system. In addition, the liquid liabilities of central banks are the instrument in which the bulk of domestic payment obligations are legally finally settled.

The IMF’s interest in payment system issues has been broad and longstanding. Working with other institutions—notably the World Bank, the Bank for International Settlements (BIS), and member central banks—with interest and expertise in payment system reform, the IMF renders technical assistance to support structural and financial sector reform efforts worldwide, typically in transition economies and developing countries. In addition, in its work on surveillance and use of IMF resources, as well as its research activities, the IMF is placing increasing importance on payment system issues. Financial risk management in payment systems, as an element of banking soundness and stability, has implications for macroeconomic stability. Indeed, the IMF has intensified its work on financial sector surveillance. In this context, it pays attention to systemic risks associated with the operation of payment systems and with their implications for monetary management and prudential supervision.

This book reflects the continuing and increasing interest of the IMF in payment system issues, from a public policy perspective. The book originated in a set of papers prepared for the information of the IMF Executive Board and staff. It provides a broad overview of the main policy and strategic issues in payment system reform being addressed by countries around the world. It also describes the structure of various payment systems, particularly those that handle large-value and time-critical payments. The book highlights that in payment system policy there are areas in which a general consensus has emerged, but also aspects for which countries have different practices. It then indicates the direction for future payment system policy analysis and research.

Michel Camdessus

Managing Director

International Monetary Fund

Preface

The intensification of the IMF’s work on financial sector surveillance is expected to require closer attention to systemic risks associated with the operation of payment systems and with their implications for prudential supervision and monetary management. This book identifies the main policy concerns and examines recent experiences of selected countries at various levels of development.

A payment system encompasses a set of instruments and means generally acceptable in making payments; the institutional and organizational framework governing such payments (including prudential regulation); and the operating procedures and communications network used to initiate and transmit payment information from payer to payee and to settle payments. Payment systems facilitate the exchange of goods and services between economic agents using an accepted medium of exchange (money). A modern payment system typically has a range of specialized subsystems developed to serve particular sets of customers; some of these clear and settle small (retail) payments, some large (and time-critical) payments, while some cover both large and retail settlements.

The payment system has importance for the functioning and integration of financial markets. It influences the speed, financial risk, reliability, and cost of domestic and international transactions. As a consequence, it can, among other things, act as a conduit through which financial and nonfinancial firms and other agents affect overall financial system stability, with a potential for domestic and cross-border spillover effects. The payment system also affects the transmission process in monetary management, the pace of financial deepening, and the efficiency of financial intermediation. Thus, monetary authorities have typically been active in promoting sound and efficient payment systems and in seeking means to reduce related systemic risks. Moreover, when changes occur in the payment system, the monetary policy decision-making process must take account of their implications for the design and desirable settings of monetary policy instruments, the choice of indicators, and the nature and effectiveness of the monetary policy transmission process.

From the perspective of both monetary operations and prudential risk management, the primary focus of central banks (acting on behalf of the public authorities) has been on those systems handling large-value and time-critical payments—namely large-value funds transfer systems (LVTSs). In this context, central banks strive to develop interrelated policies toward risk management within the payment system (buttressing conventional prudential banking supervision arrangements) and operational efficiency.

Risk management measures have focused on: (1) ensuring settlement finality within netting systems by establishing appropriate membership criteria, exposure limits, collateralization and loss-sharing arrangements, and by shortening time lags in settlements (generally to achieve same-day settlement); (2) promoting, as feasible, real-time gross settlement (RTGS) systems; (3) economic pricing, collateralization, and limits on central bank intraday credit; (4) requiring settlement in the books of the central bank by all clearing systems; and (5) fostering international cooperation to reduce risks in cross-border payments.

For operational efficiency, the ultimate aim of the central bank is to prevent payment gridlock and avoid undue constraints on payment processing speed and volume. The methods used have combined some or all of the following: sophisticated queuing systems; central bank credit (especially intraday); central bank reserve money management policies (including reserve requirements averaging); policies promoting development of interbank markets (both interday and intraday); access to information on account balances at the central bank throughout the day as part of the design features of a RTGS system; consolidation of commercial bank accounts at the central bank; and policies toward mutual exposures (multilateral and bilateral)—especially intraday debits and credits—in interbank (typically netting) systems.

Central banks and public authorities in general also take policy actions to promote economic efficiency of resource use in the payment system. These measures include (1) providing an enabling institutional and legal environment for the efficient provision of specialized payment systems; (2) designing legal and organizational reforms in the public sector, and competition policy, to reduce distortions; and (3) ensuring that in supplying its payment services the central bank pursues welfare-enhancing policies, including proper economic pricing of its facilities, use of cost-benefit analysis in investment decision making, permitting open competition from the private sector in the provision of nonsettlement services, and allowing equal access to its payment facilities on the basis of uniform and objective criteria.

This book, which covers the above matters, is organized as follows. Part I gives an overview. Chapter 1 discusses the main objectives of recent payment system policy initiatives, indicating the role played by risk, credit, and efficiency considerations. Chapter 2 reviews various international aspects of payment systems and their reform. The topics covered include, notably, cooperative arrangements in industrial countries to reduce the risks in cross-border transactions; harmonization efforts in the European Union; various clearing and settlement cooperative structures among nonindustrial countries; and the role of the IMF in the payment system policy area.

Part II examines the major policy issues. Chapter 3 focuses on the payment system and monetary policy. It discusses, among other issues, the interaction between developments in the payment system, liquidity management of households and firms (including banks), money and financial markets, and techniques of monetary management of the central bank. Chapter 4 deals with issues of risk management and credit in LVTSs. Chapter 5 addresses some additional aspects of payment system design, including the pricing of central bank services, domestic organizational aspects of reform, and the role of the central bank as regulator or supervisor of the private sector, on the one hand, and as competitor to the private sector, on the other hand, in the supply of noncredit payment services. Chapter 6 elaborates on some technical issues related to debit and credit instruments.

Part III discusses the payment systems and recent reforms in seven countries, and Part IV contains some concluding remarks. Finally, there is an appendix containing tables that describe LVTSs in use or under development in 21 countries.

The book is based on internal staff papers prepared for the IMF Executive Board in 1996. It represents an important element of a broader body of policy analyses undertaken in the Monetary and Exchange Affairs Department that include papers gathered in Bank Soundness and Macroeconomic Policy (Lindgren, Garcia, and Saal, 1996) and other studies on systemic bank restructuring. It is hoped that this book will contribute to an understanding of the complex relationships among payment system stability, banking soundness, and macroeconomic performance.

Manuel Guitián

Director

Monetary and Exchange Affairs Department

Acknowledgments

As with any major undertaking, this book would not have been possible without the assistance of many persons.

A particular debt of gratitude goes to Justin Zulu and Manuel Guitián, former and current Director, respectively, of the Monetary and Exchange Affairs Department of the IMF, who provided the initial impetus for the book. The manuscript from which this book has emerged was prepared initially for information of the IMF Executive Board. That endeavor benefited tremendously from the detailed comments of V. Sundararajan and Patrick Downes.

Apart from colleagues in the Financial Systems and Banking Division of the Monetary and Exchange Affairs Department who cooperated with me throughout drafting and redrafting, I would also like to thank Andrew Hook, who was there when the project started and who made detailed suggestions that proved useful, and Claudia Echeverria, on whose initial draft the section on the Reciprocal Payments and Credit Agreement of Latin America is based and who also provided valuable research assistance throughout.

The preparation of the book has also benefited tremendously from the assistance of a number of central banks who helped in diverse ways during the drafting of the country chapters (Chapters 713) and in completing the tables of the appendix. I owe a particular debt to John Kimball of the Federal Reserve Bank of Boston, who wrote the first draft of Chapter 6, and Gayle Brett, formerly of the U.S. Federal Reserve Board, who wrote the first draft of Chapter 12. Nevertheless, none of these people and institutions should be held accountable for any errors and omissions remaining in the book. In addition, the views expressed in the book, for which I take full responsibility, do not necessarily represent those of the IMF.

The factual information on countries contained in the book is based on developments up to mid-1996. This, I am positive, does not diminish the essentials: the major driving forces in payment system initiatives—related to risk, monetary policy, and economic efficiency—remain as discussed in the book.

Efficient secretarial support was provided by Hannah Faux, ably assisted by Jill Perrott and Aster Teklemariam. The book has also benefited from the editorial expertise of Jim McEuen of the IMF External Relations Department.

Omotunde E.G. Johnson

Monetary and Exchange Affairs Department

International Monetary Fund

Contents

    • Foreword

    • Preface

    • Acknowledgments

    • List of Abbreviations

  • Part I Overview

    • 1 Recent Initiatives in Payment System Policy

      • Industrial Countries

      • Middle- and Low-Income Countries

      • Economies in Transition

    • 2 International Aspects of Reform

      • Characteristics of Cross-Border Arrangements

      • Risks, Risk Control, and Reducing Settlement Risk in Foreign Exchange Transactions

      • Cooperative Approach in Cross-Border Payments: Industrial Countries

      • Other Cooperative Structures

      • Role of the IMF

  • Part II Major Policy Issues

    • 3 Payment Systems and Monetary Policy

      • Central Banking and the Payment System

      • Monetary Policy, Liquidity Management, and the Payment System

      • Monetary Management and the Problem of Float

    • 4 Large-Value Transfer Systems: Risk and Credit

      • Systemic Risks, Settlement Finality, and the Central Bank

      • Risk Management in Funds Transfer Clearing and Settlement

      • LVTSs: Net Versus Gross

      • Central Bank Credit Policy for RTGS Systems

      • Interday and Intraday Liquidity

      • Potential Effect of Intraday Credit on Financial Markets

      • Regulation of Private LVTSs

      • Varieties of LVTSs

    • 5 Critical Issues in the Design and Management of Payment Systems

      • Payment System and Social Efficiency

      • Cost-Benefit Analysis and Rational Choice

      • Path Dependence

      • Domestic Organizational Aspects of Reform

      • Other Public Policy Issues

    • 6 Some Aspects of Debit and Credit Transfers

      • Credit and Debit Transfer Systems Contrasted

      • Debit Transfers

      • Credit Transfers

  • Part III Selected Countries

    • 7 Australia

      • Overview of the Economic and Financial System

      • Institutional and Organizational Framework

      • Payment Instruments

      • Clearing and Settlement Systems

      • Role of the Central Bank

      • Major Ongoing and Planned Payment System Projects

    • 8 France

      • Overview of the Economic and Financial System

      • Institutional and Organizational Framework

      • Payment Instruments

      • Clearing and Settlement Systems

      • Role of the Central Bank

      • Major Ongoing and Planned Payment System Projects

    • 9 Poland

      • Overview of the Economic and Financial System

      • Institutional and Organizational Framework

      • Payment Instruments

      • Clearing and Settlement Systems

      • Role of the Central Bank

      • Major Ongoing and Planned Payment System Projects

    • 10 Russia

      • Overview of the Economic and Financial System

      • Institutional and Organizational Framework

      • Payment Instruments

      • Clearing and Settlement Systems

      • Role of the Central Bank

      • Major Ongoing and Planned Payment System Projects

    • 11 Thailand

      • Overview of the Economic and Financial System

      • Institutional and Organizational Framework

      • Payment Instruments

      • Clearing and Settlement Systems

      • Role of the Central Bank

      • Major Ongoing and Planned Payment System Projects

    • 12 United States

      • Overview of the Economic and Financial System

      • Institutional and Organizational Framework

      • Payment Instruments

      • Clearing and Settlement Systems

      • Role of the Central Bank

      • Major Ongoing and Planned Payment System Projects

    • 13 Zambia

      • Overview of the Economic and Financial System

      • Institutional and Organizational Framework

      • Payment Instruments

      • Clearing and Settlement Systems

      • Role of the Central Bank

      • Major Ongoing and Planned Payment System Projects

  • Part IV Conclusions

    • 14 Consensus and Direction for Future Policy Analysis

  • Appendix Varieties of Large-Value Transfer Systems

    • Glossary

    • References

The following symbols have been used throughout this book:

… to indicate that data are not available;

— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;

– between years or months (for example, 1995–96 or January–June) to indicate the years or months covered, including the beginning and ending years or months;

/ between years or months (for example, 1995/96) to indicate a crop or fiscal (financial) year.

“Billion” means a thousand million; “trillion” means a thousand billion.

“Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).

Minor discrepancies between constituent figures and totals are due to rounding.

The term “country,” as used in this book, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.

List of Abbreviations

Terms

ACH

Automated clearinghouse

ASO

Additional settlement obligation

ATM

Automated teller machine

CPU

Central processing unit

CSD

Central securities depository

DNS

Delayed (or deferred) net-settlement

DVP

Delivery versus payment, or delivery against payment

EDI

Electronic data interchange

EFTPOS

Electronic funds transfer at point of sale

EICCR

Electronic intraday cash creation right

HVPS

High-value payment system

ICSD

International central securities depository

IFTS

Interbank funds transfer system

ILF

Intraday liquidity facility

LVTS

Large-value funds transfer system

MICR

Magnetic ink character recognition

NCB

National central bank

NPC

National payments council

OCR

Optical character recognition

PIN

Personal identification number

POS

Point of sale

PVP

Payment versus payment, or payment against payment

RTGS

Real-time gross settlement

Organizations, Systems, Standards

ACU

Asian Clearing Union

BIS

Bank for International Settlements

BOJ-NET

Bank of Japan Financial Network System

CHAPS

Clearing House Automated Payment System

CHIPS

Clearing House Interbank Payments System

CIS

Commonwealth of Independent States

EAF

Elektronische Abrechnung mit Filetransfer (daily electronic clearing with file transfer-based in Germany)

EBRD

European Bank for Reconstruction and Development

ECB

European Central Bank

ECCAS

Economic Community of the Central African States

ECHO

Exchange Clearing House Organization

ECOWAS

Economic Community of West African State

EC-TACIS

European Commission-Technical Assistance to Commonwealth of Independent States

EDIFACT

Electronic Data Interchange for Administration, Commerce, and Transportation

EIL-ZV

Eiliger Zahlungsverkehr (The Bundesbank’s express electronic intercity credit transfer system)

EMI

European Monetary Institute

EMU

Economic and Monetary Union

ESCB

European System of Central Banks

FRBNY

Federal Reserve Bank of New York

FEYCS

Foreign Exchange Yen Clearing System

ISB

Interstate Bank of the Commonwealth of Independent States

LAIA

Latin American Integration Association

SIC

Swiss Interbank Clearing

SWIFT

Society for Worldwide Interbank Financial Telecommunication

TARGET

Trans-European Automated Real-Time Gross Settlement Express Transfer System

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