Front Matter Page

Reasearch Department

Contents

• Summary

• I. Introduction

• II. Some Basic Operating Principles of Wholesale Payment Systems

• III. Payment System Reforms in the United States, Japan, and Major European Union Countries

  • 1. Classification of settlement arrangements for wholesale payments

  • 2. Shifting toward real-time gross settlement

  • 3. Queuing facilities

  • 4. Settlement of foreign exchange transactions

  • 5. Delivery versus payment

• IV. The Background of Payment System Policy

  • 1. Controlling payment system risk in the United States

  • 2. Choice for real-time gross settlement in Europe

  • 3. Preparing for Economic and Monetary Union

  • 4. Co-existence of net and gross settlement

• V. Payment Reform and the Availability and Cost of Intraday Liquidity

  • 1. Reserve balances

  • 2. Range of securities eligible as collateral

  • 3. Case studies of the cost and availability of intraday liquidity

• VI. The Impact of RTGS on Liquidity of Financial Markets

  • 1. Charges for overdrafts

  • 2. Collateralization for overdrafts

• VII. Conclusion

• References

• Text Tables

• 1. Main Large-Value Payment Systems in Selected Countries

• 2. Daily Payment Flows in Selected Countries

• 3. Average Daily Gross Foreign Exchange Turnover, April 1992 and April 1995

• 4. Break-down of Daily Payment Flows

• 5. Intraday Liquidity in Selected RTGS Systems

• 6. Reserve Requirements in Selected Countries

• 7. Securities Eligible as Collateral for Daylight Overdrafts

• Appendix Tables

• Al. Main Large-Value Payments Systems in EU Countries

• A2. Intraday Liquidity in RTGS Systems in Other EU Countries

Summary

The growth in national and cross-border financial transactions during the 1980s and the corresponding increase in the size of flows through the world’s principal wholesale payment systems have led to major reform efforts. These reforms seek a reduction of the credit risk associated with intraday credit exposures that arise in net-settlement systems and in the real-time gross systems in which the central bank provides daylight overdrafts. Central banks have sought to reduce intraday payments-related credit in net settlement systems by restructuring payment systems into realtime gross settlement systems with collateralized overdrafts. Furthermore, in the existing real-time gross settlement systems, the risk-abatement programs currently in effect have taken the form of placing caps on the size of the uncollateralized daylight credit and of levying charges on such overdrafts.

The main benefit of reducing payments-related intraday credit is that a financial disturbance, such as an operational mishap, the failure of a major counterparty, or a liquidity problem in one of the key money markets, no longer threatens large parts of the financial system with the consequences of a payments gridlock. Payment system reform is the key to strengthening the market mechanism in banking and finance and to achieving a reduction in the cost of the financial safety net.

Three related issues need to be taken into consideration in evaluating the cost of the ongoing reform efforts. First, the reduction in systemic risk, owing to the reduction in payments-related intraday credit exposures, reduces liquidity in financial markets. It increases bid-ask spreads for financial instruments roughly in relation to the share of daylight overdrafts that are due to trading activity in these instruments. Second, the increase in the cost of daylight credit in central-bank-based wholesale payment systems, through collateralization or interest charges, is providing strong incentives to create private sub-netting systems as low cost alternatives to the real-time gross settlement systems with collateralized or interest-bearing overdrafts. Third, since the ongoing and planned reforms will produce two different types of payment systems--the European real-time gross settlement system with collateralized interest-free central bank overdrafts and the U.S. real-time gross settlement system with uncollateralized overdrafts subject to interest charges--there is a risk that incentives are being created for global payments flows to be redenominated to clear through the cheaper wholesale payment system.