Jan Frait, CNB Board Member
Opening Conference for Phare Project "Implementation of EU Payment Systems Standards"
Prague, 28th April 2004
Ladies and gentlemen, dear colleagues,
it is my pleasure to join you today in launching the Phare project focusing on the implementation of the EU payment systems standards. It is quite natural for the CNB to support a project like this since the role of the central bank in payment and settlement systems is traditionally high and important.
We live in a world of fiat money, which is worth nothing without a trust in it. Its acceptance depends on confidence of payers and payees in it. The maintenance of this kind of confidence is a public good that is produced by the central bank. However, the central bank is not the only producer of money, it is also produced by commercial banks. Currently, most of the money is issued via commercial bank credit. To keep confidence in a system like this, convertibility of private monies into the central bank money must be assured. This is the point where the role of central bank in payment systems steps in. The use of central bank money in these systems provides on a daily basis the test of the convertibility defined above. And the availability of central bank money for the parties that need to settle clearly reduces the systemic risk.
In practice, the central banks carry out this role in a number of ways. First, they have some operational functions ranging from distributing banknotes and coins to operating systems of interbank transfers. In reality, most payment systems settle in central bank money. Central banks are also co-operating with private sector in the provision of payment and settlement services. In addition to that, the central banks have important oversight and regulatory functions in payments and settlements that contribute to their efficiency and reliability.
The deregulation and globalization of financial markets that has taken place since 1980s multiplied the payment volumes transported by domestic as well as cross-border payment systems and lead to increased interest in them. Central banking community mainly via the Bank for International Settlements, via its Committee on Payment and Settlement Systems (CPSS) for years struggled to make the payment services save, efficient and cheap. Central banks standards in payments area are set in CPSS Core Principles for Systemically Important Payment Systems. In a similar way, CPSS together with IOSCO adopted Recommendations for Securities Settlement Systems. The widespread introduction of RTGS systems during 1990s is one of the results of CPSS effort. The understanding of importance of securities settlement systems that support "DvP" is another one. Central banking community also supported the development of the Continuous Linked Settlement Bank (CLS) launched in 2002 that helps to reduce principal risk in foreign exchange operations.
The international standards are surely reflected in the payment systems of the Czech Republic. Thanks to the forward-looking decision made at the beginning of economic transition, this country entered 1990s with the state-of-art and safe payment infrastructure based on RTGS philosophy that later on became standard of the industry. This single interbank payment system for both high and low value payments called now CERTIS performs daily more than 1 mil. transfers and with its peaks above 3 mil. transfers is one of the largest European RTGS systems.
CERTIS is also very important for functioning of some ancillary systems, mainly the short-term bond system (SKD) operated by the CNB, too. The SKD system has a dual role: it is a statutory register of securities and it is the settlement system for the securities recorded therein. The system works in real time and uses the model 1 DvP mechanism (both securities and cash leg processed on gross basis). The commercial bank's securities in the SKD serve as a collateral for intraday credit provided by the CNB to banks for their expected shortages of funds. From the end of 2002 it works as a web oriented application, which does not require any piece of software on the user side, only browser.
Let us move out from the local economy. One of the key challenges for all of us who are involved in payment services is the real progress in building the Single European Payment Area and efficient international payment infrastructure in general. The existence of the euro has created preconditions for the elimination of the distinction between domestic and cross-border payments in Europe. Though the industry has introduced important pieces of infrastructure since 1999, there still is a lot to be done. To meet the initial expectations, the cooperation of various regulatory institutions, commercial banks and central banks has to be deepened. In other words, we have to rethink things and move our attention from national to international considerations. After establishing modern and efficient national payment devices, we have to do the same in a global sense. The model in which global markets settle in central bank money via vertically separated domestic silos is not sustainable. We need the model with horizontally integrated cross-border segments.
There really is something on the way. The central banking community appreciates that the banking industry has set up the European Payments Council, which is working hard on issues important for creation of true Single European Payment Area. Recently we have really seen remarkable steps in pushing the idea through. Last year, EBA Clearing Company launched the first pan-European system for mass low value payments labelled STEP2. What is very important is the philosophy behind it. The system has not been conceived to limit itself to cross-border payments but to progressively integrate domestic traffic. Hopefully, we will see similar solutions for other products in the near future.
The CNB can express a great satisfaction that the ESCB has also moved towards the philosophy of pan-European payments trimmed off the old-style national aspects. After the long and difficult discussion, the pre-agreed path towards TARGET2 has been publicly announced. The solution chosen, the Single Shared Platform with no distinction between domestic and cross-border payments, is the one that has always been supported by the CNB. In 2007, there should be a truly modern system in place, with core services available right from the start. The important features will be the settlement in central bank money for up to 1000 banks participating directly, intraday pooling services for a group of accounts, no exclusion according to the amount or type of participant, and highly urgent routes not only for central banks but for the ancillary systems, too. The way towards this will not be easy. TARGET2 is surely one of the most demanding projects in the European financial sector since a lot of sub-projects must be synchronized among the large number of participants. We wish it all the success. I also wish a success to your project.