MONEY MARKETS, MONETARY POLICY AND PAYMENT SYSTEMS: policy issues for CB Joaquín Bernal R. * Banco de la República (Colombia) Seminar on Redefining the Landscape of PS Cape Town – World Bank - April 2009
(* the views expressed here are my own and should not be interpreted as those of the Banco de la República)
AGENDA 1.
Introductory remarks on payments system, money markets and monetary policy
2.
Network attributes of the PS and management challenges in a RTGS
3.
The financial crisis and policy issues for CB in a RTGS
liquidity
Large Value Payment Systems (LVPS)
As financial markets develop, intermediaries (FI) increasingly need an infrastructure that ensures secure, cost-effective, timely and irrevocable transfer of monetary claims to settle payment obligations => Its design and organization is a function of the specific payment needs and capabilities of the economy
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A LVPS has three main objectives (CPSS, GG-PSD, 2006): Early settlement of time-critical payments (value-date and in CB money) Minimisation of systemic risk At the minimum possible operational and liquidity cost
LVPS and money markets
A LVPS facilitates the redistribution of CB funds between FI with excess balances to those in need of them
=> it fosters the integration of interbank money markets (and other financial markets) and arbitrage between them, which is also essential for the transmission mechanisms of monetary policy For a market-based monetary policy, an efficient and reliable PS is critical because: ⇒
Helps to a more stable banks demand for R by reducing floating which allows the authorities to more precisely measure the incidence of its policy decisions
PS and monetary policy Two ways relationship: 1) PS design, efficiency and safety affect the speed and predictability of the demand for money and the efficacy of some monetary policy instruments 2) Monetary policy influences the liquidity available in the PS and its opportunity cost to settle payment obligations This opportunity cost correspond to the cost of getting CB money (money base), calculated as the wedge between the overnight interbank interest rate and the remuneration (if any) paid by the CB This can affect the performance of the PS and the incentives for choosing among alternative institutional arrangements in the PS
Links between PS,monetary policy and money markets The critical link between PS, monetary policy (MP) and money markets is: Reserves (R)
R are the means of interbank payments (PS);
R are a component of the Monetary Base (B)
R are obtained and traded between FI in the money markets (MM) in order to comply with monetary and prudential regulations (where applicable) and for transactional (PS) purposes.
AGENDA 1.
Introductory remarks on payments system, money markets and monetary policy
2.
Network attributes of the PS and liquidity management challenges in a RTGS
3.
The financial crisis and policy issues for CB
4.
Concluding remarks
STRATEGIC INTERACTIONS IN RTGS NETWORKS
LVPS are complex networks that link financial institutions for large value transactions. Its smooth functioning is crucial for the efficiency and stability of the financial system. Trade-off between credit risk and liquidity risk in RTGSS Turnover ratio (Payments/ Reserves) can be very high Mobilizing the required liquidity imposes costs on banks => they have an incentive to economize on liquidity and may prefer to wait for incoming payments The higher the turnover ratio of a PS, the more reliant it becomes on the virtuous circle of coordinated actions by its constituents and their mutually reinforcing responses and strategic interaction (Afonso and Song Shin, 2008)
EFFECTS OF THE MARKET TURMOIL ON MONEY MARKETS AND PS
As the precautionary demand for liquid balances increase =>banks become less willing to lend to others => interbank funding rates show signs of distress. Vulnerable FI receive lesser incoming funds from others => they has less capacity to make timely outgoing payments => coordination failure that reduces the overall value of payment transfers in the RTGSS. Widespread uncertainty may create pressures on market interest rates => the more difficult it becomes for the CB to gauge the real structural liquidity stance of the financial system (Tumpel-Gugerell, 2007) .
AGENDA 1.
Introductory remarks on payments system, money markets and monetary policy
2.
Network attributes of the PS and management challenges in a RTGS
3.
The financial crisis and policy issues for CB
4.
Concluding remarks
liquidity
POLICY ACTIONS BY CB
PSS have so far performed very well thanks to the remarkable progress made in this area in last ten years. In order to facilitate a smoother functioning of the PSS and the money markets CB have: - expanded the supply of CB money - reduced the cost of borrowing funds from the CB - lengthened the duration of access to liquidity - broadened the types of eligible collateral - expanded the range of eligible counterparties for some activities.
INTERMEDIATION ROLE OF THE CB According to Borio (2008), “in a liquidity crisis, technically the key to effectiveness is not the net amount of liquidity provided … but its distribution in the system… the key is to ensure that liquidity reaches those that most need it and are unable to obtain it at sufficiently attractive terms in the market … …This is justifiable because it helps solve coordination failure and externalities. But raises a concern: CB may take too much risk and, if liquidity operations are large and prolonged, as recently, they may get locked in an
“exit problem”
OTHER ISSUES FOR CB
Who should have access to CB accounts? Considerations of economic efficiency, competition in the financial sector, risk management, counterparty credit risks mitigation and service continuity. Who should have access to intraday repos/liquidity facilities? To allow or not for the spillover of intraday into overnight repos in case they are not timely paid within the day? tension between the CB´s monetary policy and its payment policy: “the CB would like to increase the total supply of reserve balances for payment purposes, but doing so would interfere with its monetary policy objectives” (Keister et al 2008) divorce money from monetary policy by paying interests on Reserve balances at a target interest rate (under a floor-target channel system)??? Interesting but controversial and maybe only available to a few countries whose CB are allowed to pay interests on reserves and that have a very strong fiscal position
References
Afonso, G., H. Song Shin, “Systemic Risk and Liquidity in Payment Systems”, Federal Reserve Bank of New York Staff Report, No. 325, October 2008 Allsop, P., B. Summmers, J. Veale, “The Future of Real-Time Gross Settlement: The Role of the Central Bank”, Draft, 2008 Bech M., K. Soromäki, “Liquidity, gridlocks and bank failures in large value payment systems”, in P. Allsopp (editor), E-money and payment systems review, Central banking Publications Borio, C., “Liquidity crises: what can be done to address them?”, Draft, Joint Banque de France-ECB conference on “Liquidity in interdependent transfer systems”, Paris, 2008 Keister T., A. Martin, J. McAndrews, “Divorcing Money from Monetary Policy”, FRBNY Economic Policy Review, September 2008 Schmitz, S., “How payment Systems affect monetary policy?”, Central Banking, Vol. 17, Nr. 2, Nov 2006 Tumpel-Gugerell, G., “Opening Remarks”, Joint ECB-BoE Conference on Payments and monetary and financial stability, Frankfurt, Nov 2007
Thank you!!
