Key issues for the ECB in the field of payment systems

Speech by Dr. Willem F. Duisenberg, President of the European Central Bank, at the G10 Committee on Payment and Settlement Systems conference on "Private and public sector challenges in the payment system", Frankfurt, 12 June 2003

Ladies and Gentlemen,

It is a great pleasure for me to host this dinner today and to have the opportunity to welcome all of you – both central bank and private sector representatives – to this G10 conference. The European Central Bank is glad to host this event, which has been organised to facilitate a high-level dialogue between central banks and market participants on a variety of current issues affecting the future direction of payment and settlement systems. Such a dialogue is very important and I'm sure the discussions will provide useful input for policymaking in the years ahead. In this regard, I am pleased to see that we have attracted high-level representatives from some 42 countries.

Since we are at a payment system conference, my intention today is to say some words on the mission of the ECB and the Eurosystem in this field and on some key projects under way.

Before starting, I should like to point out that the term "Eurosystem" has been introduced to designate the European Central Bank and the national central banks of the European Union Member States which have adopted the euro. The Eurosystem is the central banking system for the euro area, in the same way as the Federal Reserve System is the central banking system for the United States.

As far as the ECB's and the Eurosystem's mandate is concerned, according to the Treaty on European Union the primary objective of the ECB is to maintain price stability. In addition, the Treaty assigns four basic tasks to the ECB: to define and implement the monetary policy for the euro; to conduct foreign exchange operations; to hold and manage the official reserves of the Member States, and – of particular relevance to this conference – to promote the smooth operation of payment systems. The ECB also has a role to play on issues relating to prudential supervision and the stability of the financial system and, finally, it has as an advisory function, for it is consulted on legal initiatives and it may submit opinions on matters in its field of competence.

While the Treaty gives us the task to promote the smooth operation of payment systems, our Statute goes further, granting regulatory powers to the ECB. It states that: "The ECB and national central banks may provide facilities, and the ECB may make regulations, to ensure efficient and sound clearing and payment systems within the Community and with other countries". It is important to note that neither the Treaty nor the Statute makes a distinction between retail and large-value payments. Neither do they limit our activities to systemic risk issues. On the contrary, they follow the logic that fostering efficiency and safety for all kind of payments, payment instruments, systems and procedures and infrastructures in general is an integral part of the central bank's responsibility for the currency. As a result, the ECB has a broad mandate in the field of payment systems to act as an operator and as a regulator or – as we say – payment systems overseer.

As regards securities clearing and settlement, like most central bank laws written before the mid-1990s, the Treaty and Statute do not explicitly mention this field. Nevertheless, there is an increasing need to apply the concept of payment system oversight also to securities clearing and settlement. This is due to the close links between payments and securities settlement activities, the impact securities settlement systems may have on systemic stability, and their crucial importance in the handling of collateral provided in central bank credit operations. Central banks have a very strong interest in the smooth functioning of securities clearing and settlement systems, both for payment systems and for monetary policy reasons. This is true for the Eurosystem, as it is for all central banks in modern economies.

The main objectives of the ECB in payment systems are: to maintain the systemic stability, to promote efficiency, to maintain the public confidence in payment systems, instruments and the currency, and, last but not least, to safeguard the transmission channel for monetary policy.

To achieve these payment systems objectives, the Governing Council of the ECB has defined and adopted a number of oversight principles and standards, including the Core Principles for Systemically Important Payment Systems. The enforcement of the Eurosystem oversight policy stance is, as a rule, entrusted to the national central bank of the country where a system or activity is legally incorporated, in line with the decentralisation principle. For systems with no clear national anchorage, the Governing Council may entrust the oversight responsibility to the ECB. This has been the case for the EURO 1 system – the most important private sector system for large-value payments in euro. The ECB is also the co-overseer for the CLS Bank, which provides settlement services for foreign exchange transactions. The lead overseer of the CLS Bank is the Federal Reserve System, while the ECB, in the framework of co-operative oversight, plays the role of overseer in respect of settlement for the euro.

In performing the task of "promoting the smooth operation of payment systems", while distinct in nature, the Eurosystem operational and oversight functions both aim at achieving the same objectives. One way of ensuring implementation and compliance with oversight standards is for the Eurosystem itself to become an operator. Thus, it has assumed responsibility for the system which has the greatest importance for monetary policy and systemic stability. The Eurosystem provides the TARGET system, the real-time gross settlement (RTGS) system for the euro. TARGET allows payments to be settled in central bank money with immediate finality and has a daily turnover of some €1,700 billion. Obviously, our mandate enables us to step in as an operator also for other activities, in particular, if there is a market failure to deliver a service critical to society. However, at present, the Eurosystem as a whole is not involved in the operation of other activities, although for historical reasons some of the national central banks of the Eurosystem are involved in the operation of national retail payment and securities settlement services.

To ensure consistency in the enforcement of the oversight policy stance, activities are co-ordinated at the level of the Eurosystem, through the appropriate committees and working groups. In particular, systems managed by the Eurosystem are subject to oversight standards that are at least as stringent as those applied to privately operated activities. For this reason, it is a principle of ours to make a clear separation between the operational and the oversight function. With regard to the implementation of the oversight standards by private sector systems, the Eurosystem prefers to convince rather than to regulate. Moral suasion and direct discussions with system operators are therefore our main tools. An important element in our function is also to act as a catalyst and facilitator for interbank co-operation. Compliance with the oversight standards is ensured in peer reviews and regular assessments made by the overseer. Ultimately, the ECB policy stance can be enforced by means of an ECB Regulation, although we have not resorted to that option so far. However, a Regulation could also be used at the request of market participants to formalise and ensure a co-ordinated and uniform implementation of a market agreement.

Turning to securities settlement, since all Eurosystem credit operations have to be based on adequate collateral, a set of standards to be met by the systems used for the delivery of eligible collateral to the Eurosystem were decided upon in 1998. These standards were set up from a user perspective. They were not intended as oversight standards, but became considered as such by the market. In competing for business, it was useful for service providers to be able to show that they fulfilled the clear Europe-wide benchmark set by the ECB. In light of this, we are working together with the European Securities Regulators to establish oversight standards applicable to European securities clearing and settlement activities. We intend to release a report on the subject for public consultation in the coming months.

Turning to the future, I should like to outline some issues of key importance to the ECB and the Eurosystem in the years to come.

While the basic objectives of oversight are unchanging, an environment that is continuously changing requires the Eurosystem to assess its policies in view of development trends. The developments in e- and m-payments, the blurring borderlines between gross and net systems and between correspondent banking and payment systems, the increased time criticality of payments due to close links with securities settlement systems and the start of operation of CLS, and the concentration of risk due to consolidation are all topical issues for central banks – and in particular for the ECB. The ECB stands ready to meet these challenges – formulating its policy stance, where appropriate, in consultation with market participants. Moreover, since these developments are not limited to single countries or currency areas, they underscore the importance of global co-operation. While the ECB has full responsibility for euro-related issues, it will contribute to increased international co-operation and is firmly committed to facilitating co-operative oversight activities.

Indeed, due to the international and global nature of payment and settlement activities, stand-alone national solutions and infrastructures are becoming less able to meet market needs. This is particularly true within the euro area, where the present fragmentation of market infrastructures reflects the needs of the past and not those of the future. The efficient functioning of our new currency requires area-wide integrated infrastructures. Therefore, although a complex subject, we need in Europe to work with determination to achieve such common integrated infrastructures. A consolidation and integration process, which maintains systemic stability while increasing efficiency, is therefore of strategic importance to us. Let me give you some examples of projects under way in this regard.

The first project concerns the future evolution and technical consolidation of the TARGET system. Currently, TARGET is a fully decentralised system, composed of RTGS platforms operated by each of the national central banks and the ECB and with an interlinking arrangement between them. In business terms, the system has been a great success. Nevertheless, to remain attractive the system needs to evolve so as to better meet customer needs by providing a far more harmonised service level, to guarantee cost efficiency and to be prepared for swift adaptation to future business requirements. Against this background, the Governing Council in October 2002 took a strategic decision on the future evolution of TARGET. In the next generation of the system – what we call TARGET2 – national central banks will remain responsible for the accounts and business relations with the participants from their jurisdiction. However, due to the introduction of a shared platform, it will no longer be necessary for every national central bank to maintain an RTGS platform of its own. Indeed, the framework decision taken in October 2002 includes strong incentives for consolidation, since after a transition period the full cost recovery principle will have to be met by all platforms and the uniform price structure will be determined on the basis of the most efficient platform.

The second project relates to the creation of an integrated infrastructure for retail payments in euro. Before the introduction of the euro, each Member State had its own national retail payments infrastructure. Cross-border payments in Europe were mainly processed via correspondent banking and to some extent via special networks operated by banking groups. Service levels for domestic payments were high, but for cross-border ones they were low. This was not an acceptable situation for the euro area. In December 2001 the politicians decided to take firm action: a European Parliament and Council Regulation was introduced, forcing banks to apply the same price to domestic and cross-border payment services in euro.

The Eurosystem is happy to see that the banking community has now set up a new governance structure, the European Payments Council, which is working intensively on a wide range of issues important for the creation of a true Single Euro Payments Area. The intention is to put up a Pan-European Automated Clearing House – also referred to as PEACH. While the PEACH framework does not necessarily aim at the creation of a single clearing house, it fully recognises the need to set up a common infrastructure able to attract a critical mass of business. Priority is given to credit transfers and the aim is to progressively integrate domestic and cross-border euro payments. The STEP2 system, operated since April 2003 by the Euro Banking Association, represents a promising starting point in this regard. PEACH solutions for other products will follow, possibly offered by other service providers. We hope that the benefits of this work will become visible very soon to the general public as well.

While the Eurosystem is in charge of re-structuring TARGET, the banking community is in the driving seat when it comes to the realisation of the Single Euro Payments Area. However, in both projects a continued dialogue between the Eurosystem and the banking community is necessary. I note with pleasure that the regular meetings that have taken place between the Eurosystem and the banking community over the past few years have greatly contributed to mutual understanding and co-operation. I trust this will be useful for both groups when bringing forward these two projects.

Since you must be getting hungry, I will conclude my remarks today by mentioning in brief two other issues of key importance to the Eurosystem.

First, the euro area would greatly benefit from an integration and consolidation of its securities clearing and settlement infrastructure. Unlike in the payments area, there is strong competition between solutions offered by different service providers in the securities field. Since our Statute requires the Eurosystem to take a neutral position vis-à-vis the systems, financial centres and categories of service providers which are competing with each other, it is not appropriate for the ECB to actively drive developments towards a particular solution. However, the ECB is committed to supporting initiatives furthering integration. As is currently the case in the field of retail payments, coordinated action by market participants would be necessary and very welcome in the field of securities clearing and settlement.

Second, I want to mention the accession process, which brings an additional dimension to our monetary and financial integration. Ten countries will join the European Union and the European System of Central Banks in May 2004 and, some years later, they will also become members of the euro area and the Eurosystem. This will require a lot of our attention in the years to come. Extensive preparations are under way to ensure the central banks and banking communities of the acceding countries a smooth entry into and operation within the new environments – also in terms of payment and settlement systems.

Ladies and Gentlemen, thank you for your attention. And since we are in Frankfurt, I should now like to wish you a "guten Appetit".