Risks in Payment Systems
Payment
Systems
The
Bank's Oversight of Payment Systems
Central
Banks and the Oversight of Payment Systems
Risks in Payment Systems
Why might payment systems fail – or why might the circulation system stop? A payment system is, in essence, a network. All networks are susceptible to two distinct types of risk. One is the risk that the failure of one agent spills over to other agents in the network, potentially resulting in gridlock in that system. The large interlocking exposures which arise naturally between participants mean that this risk is often a significant one for payment systems.
The second potential source of risk in a network arises from the dependence of all the network participants on a single supplier – so-called ‘single points of failure’. Again, this risk has a particular resonance in a payment system context. Often, payment networks are highly dependent on an agent supplying the infrastructure for payment processing and/or the exchange of payment information.
In both cases, the risks facing the network are systemic – the aggregate risk facing the network is greater than the sum of the risks of each participant were they to operate in isolation. Individual participants may have neither the ability nor the incentive to mitigate fully these systemic risks. Absent outside intervention, system participants will tend to under-invest in systemic risk mitigation. Systemic risk in payment systems has, in effect, the characteristics of a ‘public bad’. In consequence, there is a clear rationale for some third party to provide directly, or secure indirectly, the public good of systemic stability in payment systems.
This is where public policy comes into the picture. One possible means of seeking to secure the public good of systemic stability of payment systems is for the public sector to build and operate these systems itself. Historically, this has been the case in a number of countries, with the central bank owning and/or operating at least the high-value payment system. An alternative approach is for payment services to be provided by the private sector, but with a public authority ensuring systemic risk objectives are met through regulation – or oversight – of the system and/or its participants. This is the direction a number of countries have taken in the recent past
Key Resources
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Payment Systems Oversight Report Download PDF (1mb) |
