Central Banking Publications: Cambridge Annual Seminar Series: Exercising Effective Oversight Of Payment Systems, Technological Innovation And The Impact Of E-Money

Dear Delegate,
At a time of pervasive technological innovation, this training course/seminar focuses on the responsibilities of central banks in exercising effective oversight of payment systems, in developed countries as well as emerging markets. More generally, it provides an opportunity to consider the challenges central banks face in responding to the information technology revolution, and how to adapt their own business processes and operations.

It also addresses the relationship between the revolution in payment systems, the conversion to electronic payments, and the possible emergence of new forms of money - e-money. It will challenge delegates to question whether they have considered the practical implications for the management of payment systems in both national and international contexts.

Central banks are the final settlement authorities for flows of financial transactions through their national economies. The reliability of the operation of the system, including the information technology infrastructure, is crucial to the orderly operation of a nation's banking and financial system. Reliability of the payments system is therefore critical to the public's perception of the reputation of the central bank.

The core principles issued by the Committee on Payment and Settlement Systems (CPSS) of the G10 central banks (aided by representatives of 11 other central banks of countries in different stages of economic development) identified two key objectives for central banks in relation to systemically-important payment systems: security and efficiency. It also provided guidance to central banks on how to interpret and implement the core principles. This included four key responsibilities:

Course outline:
This course provides an overview of recent developments in payment systems and, through a series of case studies, examines some of the key factors driving change, both within major financial centres and emerging markets. In each of the main sessions, case studies are used to examine episodes of payment system stress and failure and to look at how systems change has been managed in practice. Participants will have a chance to question industry experts and software providers.

The course will offer a detailed exploration of the implications for central banks of the new CPSS core principles. These principles are designed to be widely applicable to central banks and financial systems world-wide and are intended to provide a means by which individual countries can assess their own payment systems. But how is this assessment and implementation to be carried out in practice, given the widely differing legal and institutional national contexts? Participants will be expected to discuss their own experience with their national central bank.

Complying with the core principles - operational implications. The CPSS report calls for central banks to ensure that their own internal operations and any external systems comply with the core principles - especially that important payment systems be given a sound legal basis. How is this to be effected? The focus will be on central banks that operate payment systems themselves.
The central bank as regulator. What are the key public policy objectives of the central bank? To what extent can or should these be pursued by regulatory activities? Where and how should the boundaries with the private sector be drawn? How much should be left to market forces? What functions must the central bank play in its role as supervisor? Which should be done within/outside the central bank?
Risk identification and management and their costs. Each of the classic risks that arise in financial markets can arise in payments systems - including credit risk, liquidity risk, legal risk, operational risk and systemic risk. In pursuing its objective of reliability, operational integrity and safety, these objectives plainly cannot be pursued irrespective of cost and other considerations (such as speed of operation). Are central banks likely to err on the side of excessively costly or cumbersome systems? How should those responsible balance possibly conflicting priorities?
Managing change in payment systems. When undertaking payment system reforms, central banks must take a lead role, but also encourage innovation from the private sector.
Managing information technology for central banks.
Disclosure policy. The CPSS report calls for central banks to disclose publicly their role and major policies with respect to systemically important payment systems. Again, how is this to be carried out in practice?
Impact of e-money: myth or reality? Some dismiss e-money as unlikely radically to alter the framework of analysis and practice developed by central banks. Another school believes that by reducing the fixed costs of banking and payments services it will usher in profound structural changes in banking and payment systems world-wide. This segment explores the issues involved.

MONDAY 3rd SEPTEMBER

Chairman: Peter Allsopp, Allsopp Consultancy Services, former Head of Payment Systems, Bank of England

DEFINING PRIORITIES AND SETTING LIMITS
TO THE ROLE OF THE CENTRAL BANK

Central banks face a host of complex challenges related to payment systems. Theys must trade off diverse public policy objectives, balancing safety and efficiency and must also play a lead role in identifying and implementing payment system reform. In addition, they must now take into account the new core principles for payment systems. This session provides an overview of the key challenges in this fast-developing area, and reviews the CPSS core principles.

Payment system oversight - what is meant by it?
Karsten Biltoft
Danmarks Nationalbank

This session will initiate one of the principal themes of the course: how are the responsibilities of central banks identified by the CPSS - with the objectives of security and efficiency - to be interpreted and implemented? The speaker will propose a hierarchy of objectives and priorities. These will then be critically examined by delegates.

The role of payment systems in the core mandate of central banks
Dr (Mrs) Iyabode Fahm Masha
Central Bank of Nigeria

This session will examine the role of efficient payment systems in the achievement of the core mandate of central banks or monetary authorities, namely monetary policy and financial sector stability. Particular attention will be paid to the critical importance of a reliable payments system to the reputation of a central bank and thus to the achievement of its macro-economic objectives.

Central banks' role in reform of the payment system - challenges and problems Peter Allsopp

Payment systems reform, especially in smaller economies, raises a host of challenges. For reform to succeed, the central bank must take a lead role in the process. This means building a consensus in favour of reform in the face of diverging, and sometimes conflicting, interests. The speaker distils the lessons of his experience advising central banks in many different countries.

John Trundle, Bank of England, Alistair Milne, City University, Bruce Summers, Federal Reserve, Karsten Biltoft, Central Bank of Denmark, Dr Masha, Central Bank of Nigeria

TUESDAY 4th SEPTEMBER

Chairman: Bruce Summers

TRENDS IN PAYMENT SYSTEMS TECHNOLOGY and LEGAL INFRASTRUCTURE

Central banks and the information technology revolution
Bruce Summers
Federal Reserve

This session will identify the broad challenges central banks face in responding to the information technology revolution. To what extent are the new technologies adequate for use in key central bank processes? This talk will describe the innovative approach of the US Federal Reserve to the organisation and governance of the technology function in the central bank and offer pointers as to how central banks can use new technology to improve their business processes and operations.

Distributed network technology, real-time processing and customers' willingness to use electronic banking interfaces will reshape banking systems world-wide in the next few years. Internet and e-commerce will have a major impact on payment systems. This talk presents current trends and analyses the need to develop a standardised format for payment instructions in order fully to automate the payment process. This is particularly important if inter-bank settlements are to be conducted via the internet.

A critical assessment of the role of public policy in payments systems
Alistair Milne
City University Business School

The presenter will argue that the essential role of public policy in payments systems is to counter the inherent inertia of incumbent operators and to encourage appropriate innovation. The operation of payment systems itself is not a public good and therefore can in principle be left to market forces.

The legal infrastructure for payment systems in emerging markets
Leading City Lawyer

This session, which will focus especially on emerging markets, addresses one of the key issues identified by the CPSS: the importance of clear legal infrastructure. Included in this will be the role of the IMF and World Bank in ensuring emerging markets have efficient and reliable payment systems; the payment system cycle; the impact of new technologies on payment systems in emerging markets; and the potential role of e-commerce.

Foreign exchange clearing - towards continuous linked settlement
Peter Allsopp

The introduction of continuous linked settlement (CLS) for the major forex markets is imminent. The hope is that this will go a long way towards eliminating Herstatt risk. How will this affect the banking system? In particular what are the implications for currencies and central banks now outside the system, but who may, in the future, join?

WEDNESDAY 5th SEPTEMBER

Chairmen: Bruce Summers and Peter Allsopp

MANAGING THE INTERFACE WITH THE PRIVATE SECTOR AND FINANCIAL MARKETS

The US is among the most advanced countries in exploring the potential of new technologies for information sharing with the private sector. Here the leading expert on US systems technology and their application to the private sector explains the approach of the Federal Reserve. The group will then discuss the lessons to be learnt from US experience for other national systems in developed countries and emerging markets.

Here a former official of the Bank of England leads a discussion on the view taken by market participants of various payment systems issues. Representatives of central banks will then discuss their experience with "benchmarking" performance against the private sector.

Building on issues raised by the operation of the TARGET system, this session will address the role of collateral in payment systems. The exchange of collateral greatly complicates the operation of payment systems yet this still plays an important role. Is it necessary? Will technology make it redundant? If so, when?

Enhancing the influence of the payment systems and
information technology functions
Group discussion

Those charged with responsibility for developing and recommending policies with respect to payment systems and/or IT frequently lack sufficient "clout" internally or externally. This session will provide delegates with an opportunity to learn from others' experience and thus enhance their contribution to the overall objective of the organisation.

ROUNDTABLE:
How to keep payment systems operating during a banking/currency crisis
Various speakers, including the Central Bank of Turkey and Bank Indonesia

One of the most important tasks of a central bank is to ensure the basic payment system can continue to operate even if the public loses confidence in the banking system and, more importantly, if banks lose confidence in each other.

THURSDAY 6th SEPTEMBER

THE IMPACT OF E-MONEY

Payment systems - measuring efficiency and success
Mr Kai Barvell
International Monetary Fund

Central banks must be able to judge the payoffs of payment system reform to their key constituencies (government, banking sector and the public). What lessons can be drawn from reform efforts so far? What has been the experience of the IMF in evaluating payment systems in its Financial Sector Assessment Programme?

A macroeconomic assessment of the future for e-money
Professors Forrest Capie and Peter Spencer

It has been said that: "Digital money is the payment system of the future…and will remain so!" In other words, it will never take off. That sums up the conventional view and explains the seeming indifference of many central banks to this issue. So far, e-money has made little or no impact on central banks, thinking in this area - although they have all taken positions with respect to the regulation and supervision of e-commerce. Two leading scholars in monetary theory argue that this may soon change. Electronic money could very well follow the development of the Internet just as paper money followed the development of printing.

EXERCISING EFFECTIVE OVERSIGHT OF PAYMENT SYSTEMS, TECHNOLOGICAL INNOVATION AND THE IMPACT OF E-MONEY