Central bank oversight of payment and settlement systems

May 2005

 

Foreword

Central banks have always had a close interest in the safety and efficiency of payment and settlement systems. One of the principal functions of central banks is to be the guardian of public confidence in money, and this confidence depends crucially on the ability of economic agents to transmit money and financial instruments smoothly and securely through payment and settlement systems. The systems must therefore be strong and reliable, available even when the markets around them are in crisis and never themselves the source of such crisis.

Central banks have traditionally influenced payment and settlement systems primarily by being banks which provide a variety of payment and settlement services to other banks. As such, central banks provide a safe settlement asset and in most cases they operate systems which allow for the transfer of that settlement asset. It is only relatively recently that oversight has become a function that is more formal and systematic - namely a function whereby the objectives of safety and efficiency are promoted by monitoring existing and planned systems, assessing them against these objectives and, where necessary, inducing change. However, although recent, this development in the nature of oversight has been rapid and the function has now come to be generally recognised as a core responsibility of central banks.

Given this importance, and the experience that has been gained over the years, the Committee on Payment and Settlement Systems felt it would be useful to set out publicly what has been learned about effective oversight. Most of this report is descriptive and analytical, explaining why and how central banks oversee payment and settlement systems. It looks at the need for oversight, the source of central banks' responsibilities for oversight, the scope of oversight and the activities that oversight involves. In addition it looks at cooperative oversight, where more than one central bank or other authority has responsibilities for a system. However, as well as this description and analysis, the report also includes 10 principles for effective oversight, each with explanatory text. Five of the principles are generally applicable to oversight arrangements while the other five are specifically for cooperative oversight arrangements. All the principles are consistent with, and indeed largely drawn from, the previous work on payment and settlement systems published by the Committee and earlier groups reporting to the G10 Governors.

The Committee set up a Working Group on Oversight of Payment and Settlement Systems to help it produce this report. The CPSS is very grateful to the members of the working group, its chairman, Martin Andersson of Sveriges Riksbank, and the CPSS secretariat at the BIS for their excellent work in preparing this report.

Tommaso Padoa-Schioppa, Chairman
Committee on Payment and Settlement Systems