1. De Nederlandsche Bank Eurosysteem GLOBAL DEVELOPMENTS Carlo Winder Conference Financial Sector of Macedonia on Payments and Securities Settlement Systems Ohrid 24 June 2008 De Nederlandsche Bank

2. Eurosysteem Agenda LIQUIDITY CRISIS PAYMENTS SYSTEMS  Global developments  Effects of liquidity crisis  TARGET 2

3. De Nederlandsche Bank Eurosysteem 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)

4. De Nederlandsche Bank Eurosysteem 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”

5. De Nederlandsche Bank Eurosysteem LIQUIDITY CRISIS SOURCES ● US Housing Market  GLOBAL CONTAGION OF markets and financial institutions Unprecedented: scale and scope of contagion

6. De Nederlandsche Bank Eurosysteem LIQUIDITY CRISIS TRANSITION PROCESS TOWARDS NEW YIELD/RISK ´EQUILIBRIUM´ Losses for Banking Industry: $ 380 billion Banks: Restructuring their Balance Sheets

7. De Nederlandsche Bank Eurosysteem LIQUIDITY CRISIS: risk management USED TO BE SMART

8. De Nederlandsche Bank Eurosysteem Crisis: Payments Systems Angle STYLIZED FACT: Scale and Scope of Contagion We live in global village

9. De Nederlandsche Bank Eurosysteem

10. De Nederlandsche Bank Eurosysteem 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

11. De Nederlandsche Bank Eurosysteem CPSS REPORT ON INTERDEPENDENCIES

12. De Nederlandsche Bank Eurosysteem LIQUIDITY CRISIS No Crisis Of P&SS Infrastructure

13. De Nederlandsche Bank Eurosysteem 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

14. De Nederlandsche Bank Eurosysteem LIQUIDITY CRISIS COOPERATION WITH SUPERVISORS (domestic and cross-border) Update Sound Practices on Liquidity Management: intraday liquidity FX Settlement Risk: use of CLS Correspondent banking: risk management

15. De Nederlandsche Bank Eurosysteem LIQUIDITY CRISIS FURTHER ISSUES Assess BCP arrangements: scope and scale of contagion, cross-border Cross-border Collateral: ELA facilities Growth of Collateral

16. De Nederlandsche Bank Eurosysteem LIQUIDITY CRISIS FURTHER POLICY ISSUES Role of third party service providers Multiple platforms for Securities Settlement Emerging Markets

17. De Nederlandsche Bank Eurosysteem 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

18. De Nederlandsche Bank Eurosysteem 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

19. De Nederlandsche Bank Eurosysteem 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

20. De Nederlandsche Bank Eurosysteem Liquidity saving features in TARGET 2 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

21. De Nederlandsche Bank Eurosysteem Liquidity pooling - Virtual account Credit institution e.g. Bank A2 Credit institution Bank A3 Credit institution e.g. Bank A1 Group account 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

22. De Nederlandsche Bank Eurosysteem 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

23. De Nederlandsche Bank Eurosysteem MARKETABLE ASSETS Type of assetsECB debt certificates; other marketable debt instruments Credit standardsAsset of high credit standard; using ECAF rules Place of issueEEA Settlement/handling procedures Settled in euro area; centrally deposited in book- entry 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 marketsRegulated markets; non-regulated market accepted by ECB CurrencyEuro Cross-border useYes (No minimum size; no governing law)

24. De Nederlandsche Bank Eurosysteem NON-MARKETABLE ASSETS: CREDIT CLAIMS Type of assetsCredit claims Credit standardsHigh 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 CurrencyEuro Minimum sizeUntil Dec 2011: NCB choice for domestic use; 500,000 for cross-border use. After 1 Jan 2012: 500,000 Governing lawLaw of a euro area Member State; Cross-border useYes (Additional legal requirement: verification of existence, notification of debtor or registration, no restrictions from banking secrecy, no restrictions on mobilisation or realisation). (Not applicable: place of issue; acceptable markets)

25. De Nederlandsche Bank Eurosysteem Marketable assetsCredit claims Valuation haircut Liquidity category Coupon type Residual maturity Type of interest rate payment Valuation methodology (NCBs) Variation margin Trigger point (0.5%) Assets or cash (depends on NCBs) Trigger point (0.5%) Risk control measures

26. De Nederlandsche Bank Eurosysteem THNX