The role of central bank money for large value pay

1TheroleofcentralbankmoneyforlargevaluepaymentsystemsRobertLindleyDeputyHead,CPSSSecretariatRegionalworkshoponreformingpaymentandsecuritiessettlementsystemsfortheMiddleEastandNorthAfricaBahrain,Wednesday16March200512Overview1.Somestylisedfactsaboutcentralbankmoney2.Whomustusecentralbankmoney3.Whocanusecentralbankmoney4.Servicesoncentralbankaccounts3ImportanceofmoneyAlmosteveryeconomictransactioninvolvesmoneyEconomicagentsfreetochoosemeansofpaymentMostmoneyis“fiat”money–soacceptancedependsontrustKeyroleofcentralbankistomaintaintrustinmoney–bothitsvalue(monetarypolicy)anditscirculation(paymentsystems)1.Somefactsaboutcentralbankmoney4Money,money,money….TypeofmoneyCash(banknotesandcoins)Deposits(current/sight)E-money1XnotnowlimitedaccessXnotyet?TypeofissuerCentralbankCommercialbanks1CoinsareusuallyissuedbytheMinistryofFinance(thiscomplicationisignoredintherestofthepresentation)5CentralbankcashCentralbankhasmonopolyButuniversal“access”–everyonecanusecashWhy?CashisabearerinstrumentSafeandconvenientforuserstohavecentralbankmonopoly–noneedtoworryabouttheriskinessoftheissuerAmonopoly?Inefficient?Costmaynotbetoohigh.6CentralbankdepositsCentralbankandcommercialbanksbothissuedepositmoneybutaccesstocentralbankdepositmoneyisusuallyverylimited(egmostlybanksandgovernment).Why?7ArchitectureofdepositmoneyCentralbankCentralbankandcommercialbankmoneyADCBADCB“Free”bankingMoreefficientbutlesssafe?AbalancebetweensafetyandefficiencyMonobankingSafebutlessefficient?CentralbankEfficient-competitionbetweenbanks(moreimportantthanwithcash)Safe–banks(andcustomers)indifferentaboutwherepaymentscomefrom8AdvantagesanddisadvantagesofsettlingincentralbankmoneyAdvantagesforbanksSafety(creditandliquidityrisk,businesscontinuity)Liquidity(routineandemergency)Efficiency(singlesettlementinstitution)Neutrality(centralbankisnotusuallyacompetitor)Otherperceivedbenefits(safetynet)DisadvantagesforbanksNointerestpaidRegulatorycosts9“Thesinglenessofthecurrency”Originallyaresultofcentralbankmonopolyofcash……and,fordeposittransfers,interbanksettlementatthecentralbankMorerecentlyalsosupportedby:depositinsurancebankingsupervisionwhichmeanweworrylessaboutbankfailuresOnedollarisonedollarisonedollar…regardlessofwhoseliabilityitis.10ThreeissuesWhomustusecentralbankmoney–whomusthaveacentralbankaccount?Whocanusecentralbankmoney–whoisallowedtohaveacentralbankaccount?Whatservicesshouldthecentralbankprovideontheaccounts?ADCB11Paymentsystems1Systemicallyimportantpaymentsystems“Assetsusedforsettlementshouldpreferablybeaclaimonthecentralbank;whereotherassetsareusedtheyshouldcarrylittleornocreditorliquidityrisk”Coreprinciplesforsystemicallyimportantpaymentsystems(SIPS)Reason:safetyInpractice,almostallSIPSdosettleincentralbankmoneyMainexceptions:foreigncurrencysystems(nb:CLSaskeyexample)2.Whomustusecentralbankmoney122Otherpaymentsystems?UsuallyallowedtosettleincentralbankmoneybutdonothavetoInpractice,mostusuallydoEfficiencyandneutralityparticularlyimportantSometimesdiscouraged(particularlyifsystemincludesnon-banksasparticipants)13Individualbanks?CentralbankBEDCSingle-tierstructureFABCentralbankCADTwo-tierstructureEFSecondtierbanks(indirectparticipants)Firsttierbanks(directparticipants)14TieringExtentoftieringdependspartlyoncostsPartlyontraditionPartlyoncartels(especiallyinthepast)…butrarelyforbidden.(NBHongKong.)Usuallycentralbanksleaveituptoindividualbankstodecide.Why?•Bigbankstypicallydousecentralbankmoney•Efficiencybenefitsmayoutweighsafetycosts•Difficulttoenforce•But……15Concentration……CentralbankBEDCSingle-tierstructureBCentralbankCADTwo-tierstructureFAEFIsthisaquasi-system?Flowsviacentralbank:A↔BA↔CA↔DA↔EA↔FB↔CB↔DB↔EB↔FC↔DC↔EC↔FD↔ED↔FE↔FFlowsviacentralbank:A↔BA↔FB↔CB↔DB↔EB↔FC↔FD↔FE↔F16Quasi-systemsCentralbanksstillconsideringwhat(ifanything)todoUnlikelytoleadtolimitsontieringMayleadtooversightofquasi-systems(iesomepaymentsystemstandardsappliedtoBankA)Practicalissues(eghowbigdoyouhavetobetobeaquasi-system)Cooperationwithbankingsupervisorslikely17Whocanhaveaccess?AlwaysoralmostalwaysOftenSometimesNeveroralmostneverBanksNon-banksecuritiesfirmsOthernon-bankFIsGeneralpublicCentralbanksandIFIsRemoteaccessbanksCorporatesCentralgovernmentOthergovernmentCentralbankstaffKey:increasingtrendnochangedecreasingtrend3.Whocanusecentralbankmoney18Increasingtrend(1)Non-banksecuritiesfirmsandothernon-bankfinancialinstitutionsMaybesimilartobanks–theborderlineisnotalwaysclearAdvantagesofallowingaccesssystemicrisk?competitivedisadvantage?centralbankneutrality?Disadvantagesofallowingaccessmoralhazard?disintermediation?risktocentralbank?ADCB19USDUnitedStatesHongKongGermanyBankBankBankBankBankBankIncreasingtrend(2)RemoteaccessMainissueisrisk(especiallyifcreditisavailable)Istheredemand?NBCLSaskeyexample20DecreasingtrendGovernment(centralandother),centralbankstaff,generalpublic,corporatesAdvantagesofallowingaccess“Experience”forthecentralbankNeutrality(forgovernment)DisadvantagesofallowingaccessUnfairadvantage?(regeneralpublicandcorporates)No