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)
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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);
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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
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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

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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
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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
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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
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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!!