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De Nederlandsche Bank
GLOBAL DEVELOPMENTS
Carlo Winder
Conference Financial Sector of Macedonia
on Payments and Securities Settlement
Systems
Ohrid
24 June 2008
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Agenda

LIQUIDITY CRISIS
PAYMENTS SYSTEMS
 Global developments
 Effects of liquidity crisis
 TARGET 2

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LIQUIDITY CRISIS
key words: EXCESSIVE OPTIMISM
EXCESSIVE RISK APPETITE
ASPECTS
● Relative Stability (the great moderation, Bernanke) cy
● Search for Yield
● Easing Criteria for Credit (subprime, alt-a etc)
● Innovations (originate-to-distribute model, monoliners
etc)
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LIQUIDITY CRISIS
Chuck Prince, CEO Citibank
FT, July 2007
“ When the music stops, in terms of liquidity,
things will be complicated. But as long as the
music is playing, you´ve got to get up and
dance. We´re still dancing”
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LIQUIDITY CRISIS
SOURCES
● US Housing Market 
GLOBAL CONTAGION OF
markets and financial institutions
Unprecedented: scale and scope of contagion
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LIQUIDITY CRISIS
TRANSITION PROCESS TOWARDS NEW
YIELD/RISK ´EQUILIBRIUM´
Losses for Banking Industry: $ 380 billion
Banks: Restructuring their Balance Sheets
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LIQUIDITY CRISIS: risk
management
USED TO BE SMART
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Crisis: Payments Systems Angle
STYLIZED FACT:
Scale and Scope of Contagion
We live in global village
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Payments and Securities Infrastructure
WEB OF GLOBAL INTERDEPENDENCIES
(LVPSs, CCPs, CSDs, Banks)
WITH TIGHT DEADLINES
(RTGS, DVP, PVP)
Key words
● technological developments
● globalization
● consolidation in financial sector
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CPSS REPORT ON INTERDEPENDENCIES
Figure 6: Profile of Institutions’ Activities and Access Choices, 2006
(by country, with number of financial institutions* in parentheses)
Very
Significant
International
Settlement
Activity
Significant
International
Settlement
Activity
Moderate
International
Settlement
Activity
CH (1)
FR (1)
JP (1)
US (1)
DE (1)
NL (1)
UK (1)
US (1)
UK (1)
CH (1)
NL (1)
IT (1)
FR (2)
JP (1)
BE (2)
IT (2)
JP (1)
NL (1)
SG (1)
US (3)
CA (5)
DE (2)
FR (1)
SE (3)
UK (1)
DE (1)
JP (1)
UK (1)
Primary reliance on
correspondents
and custodians
beyond home
currency; direct
participation in CLS
and one or more
ICSDs
Mixed Approach: Significant selfclearing in multiple currency zones,
but moderate levels of direct
participation
Domestic, plus
Domestic, plus
one or two of:
more than three
EUR, USD, or
CPSS currencies
YEN
Significant selfclearing in most
CPSS
currencies, and
beyond
* At the highest holding company level
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LIQUIDITY CRISIS
No Crisis
Of
P&SS
Infrastructure
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LIQUIDITY CRISIS
No Crisis of P&SS Infrastructure
BUT it may have an infrastructural impact, e.g.
Need for further standardization (operating
rules,legal devices etc)?
 US: intraday credit policy
 UK: highly tiered structure of CHAPS
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LIQUIDITY CRISIS
COOPERATION WITH SUPERVISORS
(domestic and cross-border)
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Update Sound Practices on Liquidity
Management: intraday liquidity
FX Settlement Risk: use of CLS
Correspondent banking: risk management
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LIQUIDITY CRISIS
FURTHER ISSUES

Assess BCP arrangements: scope and
scale of contagion, cross-border
Cross-border Collateral: ELA facilities
 Growth of Collateral
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LIQUIDITY CRISIS
FURTHER POLICY ISSUES
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Role of third party service
providers
Multiple platforms for
Securities Settlement
Emerging Markets
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Intraday liquidity
Settlement risk ↓

importance of sound liquidity management ↑
Relevant for Intraday Liquidity:
 differs from other liquidity concepts, and
 hence the supervision tools for managing
intraday liquidity risks are different
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Intraday liquidity
Specific features of intraday liquidity
 Liquidity saving features in payment systems
 Multilateral participation (´multilateral netting´)
Consequently, in times of shocks:
 Gross claims become relevant
 Source of the problem is difficult to trace
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Liquidity saving features in LVPSs
Examples
BIS, New developments in large-value payment
systems, 2005)
 Increased customisation and centralisation of
payment control functions
 New queuing arrangements and release
methods, offsetting processes
 Introduction of multiple settlement streams
(with different risk/costs profiles)
 Alternative forms to achieve continous finality
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Liquidity saving features in TARGET 2
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Reservation, prioritisation, sender limits,
active queue management, consolidated
account information

More specifically for liquidity issues
Intraday pooling on a cross-border basis
Offsetting payment flows
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
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Liquidity pooling - Virtual account
Credit institution e.g.
Bank A1
Credit institution e.g.
Bank A2
Credit institution
Bank A3
Group account
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virtual balance : balance on (single) accounts + credit lines
possibility to „use“ this position by each group account
holder
booking on the single accounts (not on the virtual account)
only intra-day: „levelling“ off at the end of day mandatory De Nederlandsche Bank
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COLLATERAL - Eurosystem
ESCB conditions for collateral framework
uniform eligibility criteria
● Protecting the ESCB from incurring losses in
its monetary policy operations
● Ensuring equal treatment of counterparties
● Enhancing operational efficiency and
transparency
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MARKETABLE ASSETS
Type of assets
ECB debt certificates; other marketable debt
instruments
Credit standards
Asset of high credit standard; using ECAF rules
Place of issue
EEA
Settlement/handling
procedures
Settled in euro area; centrally deposited in bookentry form with central banks or SSS fulfilling
ECB’s minimum standards
Type of
issuer/debtor/guarantor
Central banks; public sector; private sector;
international and supranational institutions
Place of establishment of
Issuer/debtor/guarantor
Issuer: EEA or non-EEA G10 countries; Guarantor
EEA
Acceptable markets
Regulated markets; non-regulated market
accepted by ECB
Currency
Euro
Cross-border use
Yes
(No minimum size; no governing law)
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NON-MARKETABLE ASSETS: CREDIT CLAIMS
Type of assets
Credit claims
Credit standards
High credit standard for debtor/guarantor; using ECAF
rules
Settlement/handling
procedures
Eurosystem procedures
Type of
issuer/debtor/guarantor
Public sector; non-financial corporations; international
and supranational institutions
Place of establishment of
Issuer/debtor/guarantor
Euro area
Currency
Euro
Minimum size
Until Dec 2011: NCB choice for domestic use; 500,000
for cross-border use. After 1 Jan 2012: 500,000
Governing law
Law of a euro area Member State;
Cross-border use
Yes
(Additional legal requirement: verification of existence, notification of debtor or
registration, no restrictions from banking secrecy, no restrictions on
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mobilisation or realisation). (Not applicable: place of issue; acceptable markets)
Risk control measures
Marketable assets
Credit claims
Valuation
haircut
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Liquidity category
 Coupon type
 Residual maturity
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Variation
margin
Trigger

point (0.5%)
 Assets or cash
(depends on NCBs)
Residual maturity
 Type of interest rate
payment
Valuation methodology
(NCBs)
Trigger point (0.5%)
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THNX
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