Central Banks and the Oversight of Payment Systems
Payment
Systems
The
Bank's Oversight of Payments Systems
Central Banks and the Oversight of Payment Systems
Risks
in Payment Systems
In practice, the role of payment systems overseer has been assigned to central banks in many countries. In part, this reflects the fact that there is a natural symbiosis between central banks and payment systems. The liabilities of the central bank – ‘central bank money’ – are the apex of the payment system as, being risk-free, they represent the ultimate means of discharging obligations between parties. Notes and coin can play this role directly in respect of the general public, while central bank settlement accounts play this role in respect of the banking community. The central bank becomes the settlement agent, and its liabilities the settlement asset, for the economy.
In the United Kingdom, the Bank of England’s liabilities first became a settlement asset in the 18th century in respect of notes, while the Bank’s role as settlement agent emerged in the mid-19th century with the advent of settlement accounts for the banking sector. This settlement agent role has continued ever since. Out of this role emerged, with time, a concern with what are today widely acknowledged as the core functions of central banks – monetary stability and financial stability.
So payment systems are the foundation on which central banks’ core purposes are built. They are also the bridge between them, for a breakdown of the payment system would disrupt both monetary and financial stability. In continuing to meet its core purpose objectives, therefore, the Bank has a key role to play in overseeing these systems to ensure their robustness.
This role and the Bank’s responsibilities in respect of payment systems were formalised in the Memorandum of Understanding (MoU) with HM Treasury and the Financial Services Authority (FSA).
Many central banks’ responsibilities for oversight of payment systems are defined in statute. Accompanying these responsibilities are, in some cases, statutory powers of certain kinds – for example, the power to require information or set rules for the system. The UK regime is to some extent unusual as neither responsibilities nor powers for payment systems oversight are defined in statute.
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