Sibos 2008 in Vienna — 15-19 September 2008

Risk reduction is a key priority of the global payment systems. Central Bankers and payment processors across the regions will discuss the current landscape and best practices for managing risk and liquidity in payment processing.

Keeping payments on track in the eye of the storm

Central banks focus on ensuring smooth processing of payment flows as both volumes and values continued to rise

Richard Oliver, Executive Vice President, Federal Reserve System,

The peak payment volumes prompted by the ongoing crisis in the financial markets are among the factors that are forcing a widespread reappraisal of payment systems priorities by central banks, delegates heard at yesterday’s session, ‘Payment systems: how to monitor risk while improving liquidity and information flow’.

Session moderator Lisa Rossi, Managing Director, Deutsche Bank, said that payment systems were holding up well under the pressure of increased flows from investment banks in the wake of Lehman Brothers’ bankruptcy filing, but added that ever-higher volumes, new payment behaviours by banks and advances in technology platforms were driving change.

Richard Oliver, Executive Vice President, Federal Reserve System, said that the US central bank’s philosophy had changed in recent years from an approach that had prioritised risk considerations over liquidity. “Now we’re reversing the flow,” said Oliver. A reduction in banks’ overnight balances held at the Fed, due to use of sweeps, and a concentration of payments flows to late in the day were among the factors that have led to the central bank considering a proposal to replace its existing fee structure and allow banks to collateralise their daylight overdrafts. The Federal Reserve expects to pay interest on banks’ reserves for the first time. “We want to take away the stress and stigma of holding large deposits overnight,” said Oliver.

Streamlining payment flows
Dieter Becker, head of TARGET2 at the European Central Bank, said a key reason for replacing its decentralised TARGET platform was the desire of commercial banks to maximise the functionality available from different central bank systems. “They wanted risk management features, but they also wanted access to better information on payments flows and improved liquidity management functionality,” said Becker. Since its introduction in November 2007, many large banks are making full use of TARGET2’s sophisticated functionality to become “masters of liquidity”, said Becker. “By 1pm, around 50% of the day’s payments by value have already been processed, leaving the banks to focus on liquidity management in the afternoon,” he said. Despite TARGET2’s “bells and whistles”, the banks still wanted more flexibility, asserted Becker. To this end, the ECB’s governing council has agreed to centralise collateralisation processes on a single platform.

Having introduced an RTGS system around a decade ago, the Monetary Authority of Singapore is continuing to monitor banks’ payments behaviour and adjusting its policies to manage growing demand. Terry Goh, director, specialist risk supervision, payment infrastructure, said that MAS has had only limited success in encouraging banks to schedule payments earlier in the day through pricing incentives. “Banks are mainly only processing low-value payments early on, with high-value payments held until later,” he said. “We need to tune our pricing of timed payments further by adding a value element.” Goh also suggested a more psychological barrier to the smooth flow of payments across MAS’s RTGS system. “Banks are unduly worried about using the intraday facilities we offer because they don’t want to be perceived as having liquidity problems,” he said.

While acknowledging the ongoing need to help banks manage their payments system liquidity effectively, the Fed’s Oliver sounded a note of caution on the convergence of low- and high-value payments systems. “From a risk management perspective, do you go to the highest or lowest denominator? I thing we’ll see slow progress on this one,” he said.