Opening speech Joint opening of the Euro Finance Week conferences T2S, Payments, and Digital upheaval in the banking business in Frankfurt am Main

Dear ladies and gentlemen,

 

the Euro Finance Week is an excellent opportunity every year to foster dialogue within the banking business, especially so when major changes are in the offing.

This joint opening for the three conferences T2S, Payments, and Digital upheaval in the banking business brings together three key topics which could fundamentally change the course of developments in the payments and settlement space.

My speech will look specifically at the German market from the point of view of the Bundesbank.

1 T2S

T2S is a crucially important initiative, not just for the Eurosystem, but also for Germany - the euro area's biggest economy - and for Frankfurt as a major financial hub. The Bundesbank performs several important functions in T2S over and above the role it plays as a constituent part of the Eurosystem, which runs T2S.

  • For one thing, as a member of the dedicated 4CB team, we develop and run T2S at our own operating site alongside the Banca d'Italia, building on the experiences gained in designing and operating TARGET2. Almost everybody in this room is familiar with TARGET2. However, precious few individuals are likely to know just what is processed using TARGET2. Around 350,000 transactions worth €1.9 trillion are effected each working day. The total daily amount handled by TARGET2 is in fact equivalent to two-thirds of Germany's annual GDP.

  • Moreover, the Bundesbank provides central bank money for T2S settlement as part of the operationalisation of monetary policy. That is to say, we channel liquidity from the TARGET2 accounts into the T2S dedicated cash accounts, and we provide intraday credit via auto-collateralisation. These are services we have been offering ever since the migration of Monte Titoli on 31 August, even though Clearstream Banking AG - Germany's central securities depository - has not yet migrated to T2S.

Why did we do that? Quite simply because we wanted our liquidity pooling to be operational from the very outset of T2S. That's why we offered our customers the opportunity to open dedicated cash accounts with us from day one. Nine payment banks have since taken us up on this offer.

Given our oversight function and the importance of financial stability, it goes without saying that stability is especially important for the Bundesbank. Three aspects are key in this regard.

  1. The cash leg of T2S securities transactions is settled in safe central bank money, both for national and cross-border transactions.

  2. T2S shortens settlement chains.

  3. And T2S also uses the tried-and-tested TARGET2 business continuity model, with four sites in two regions at the Banca d'Italia and the Bundesbank.

T2S is the Eurosystem's largest market infrastructure project by far. After nearly 10 years of preparations, the platform finally went live on 22 June 2015. We are proud of this achievement.

CSDs from five countries, along with their respective national banking communities, have migrated to the T2S platform since then, and nine central banks have been supplying the liquidity needed for settlement. The number of settled transactions started out quite low, but grew fifty times in size upon the slightly delayed migration of Monte Titoli. This October, T2S settled an average of roughly 90,000 transactions per day with a value in the region of €500 billion. The two big central securities depositories, Euroclear and Clearstream, still have to migrate. Viewed in terms of a marathon, we have only run slightly more than 6 km of the full distance.

So what's next on the agenda? Well, we're naturally relieved that the launch went to plan, but the "to do" list is as full as ever. Much work still lies ahead of us if we are to successfully migrate all the CSDs and their customers to T2S. The 4CB team, in particular, will be under additional strain for quite some time to come. On top of running their day-to-day operations, they face the challenge of implementing the next rounds of tests and adjustments for the forthcoming migration waves.

Euroclear announced two weeks ago that it would need more time to prepare for migration. Testing activities are still ongoing within the Euroclear community, however. We are currently in the process of evaluating - both within the 4CB team and in conjunction with the other CSDs at the Eurosystem level - how a later migration of Euroclear can be facilitated. It's a move that won't leave the other T2S participants entirely unscathed. But, as always, the stability of the system as a whole is paramount. I expect the ECB's Governing Council to pass a decision on this topic in or around January next year.

But there's one point I'd like to share with you today. The timeline for the complete migration of all participants to T2S may have moved back a little further on account of the Euroclear delay, but I am in no doubt that we will accomplish our common objective - a European hub for securities settlement in central bank money - and also put in place a cornerstone of Europe's future capital markets union.

2 Digital upheaval in payments

Ladies and gentlemen,

another topic on our agenda, alongside T2S, is the wave of transformative change sweeping through the payments space. "Instant payments" is just one of the buzz words I could mention here.

That's what makes the two other conferences - on payments and on the digital upheaval - just as important and promising as the T2S session. But if I may, I would like to confine my brief introductory remarks to the topic of digital upheaval, which impacts the payments world just as directly.

Payments and settlement - often regarded as a boring and stable line of business - looks set to be radically transformed. Digitalisation has already sparked some changes in the banking sector, and in my eyes, a lot more change still lies ahead of us.

And unlike upheavals we've seen in the past, the bulk of which originated solely on the supply side, this particular wave of change is approaching us from the demand and the supply side simultaneously. On the demand side, customers familiar with certain technologies and apps now want to use them in their banking affairs, too. As for the supply side, fintechs - fledgling enterprises overflowing with fresh ideas that are far removed from banks' traditional compartmentalised line of thinking - are bursting into the market, as are a handful of innovative financial institutions with products to rival those of market incumbents.

In the good old days of analogue technology, the banking business entailed the provision of a service of a sensitive nature that required particularly trustworthy providers. Trust, then, was a core asset underpinning this line of business. And banks enjoyed this trust - not least because they were subject to particularly rigorous supervision.

Now, as then, trust is a particularly important asset in any banking transaction. But in a break from the old days, the value chain - once the exclusive reserve of banks - is now increasingly being unravelled. Digitalisation is making it possible for what was once a closed value chain to be broken up into its constituent parts. And non-banks are stepping in to carve out more and more of the market, one link of the chain at a time. Not only is this squeezing the share of the spoils for banks; in some instances, it is even endangering the banking business itself. Because what is ultimately at stake here is the customer relationship.

If what were once non-banks - telecommunications or internet firms, say, or up-and-coming fintechs - have access to customers and their data, they are pretty well positioned to offer financial services of their own, challenging the banks head on.

Some of these non-banks are offering new services for which there was seemingly no demand in the past. Just take the payment services which third-party providers run for internet traders.

It is up to regulators and the anti-trust authorities to see to it that the playing field is a level one. Competition needs to be fair, and the same supervisory law should apply to the same services.

Digitalisation goes much further than this, of course. At the moment, the entire sector seems to be in awe of the hype surrounding Peer-to-Peer distributed ledger technology. This technology, otherwise known as blockchain, is used amongst other things to create virtual currencies such as Bitcoin. There are those who regard Bitcoin as the future of payments. But they ignore the fact that money and currencies only work if they are perceived to be stable. Bitcoin is subject to enormous price fluctuations. From the end of August until the 4th of November it rose in value by about 100% before then falling by 40% in the course of seven days. It is this kind of development that prompted the Bundesbank to warn against Bitcoin's lack of stability as a store of value as far back as the end of 2013.

The focus of attention is now no longer on virtual currencies but on the underlying technology itself and the ways it can be harnessed. This focus of attention means that financial institutions and fintechs, and in some cases, central banks, too, are exploring ways in which distributed ledger technology can be embedded in their operations. 

Expectations are high. After all, this technology boasts that it enables a certain value to be sent directly from A to B, bypassing intermediaries altogether. Essentially, banking without banks.

There have been pilot projects, and some applications are up and running, but it still seems to be too early to say whether and to what extent these expectations can be fulfilled and whether developments will be of a disruptive or an evolutionary nature. 

I reckon we first need to know more about what outcomes these technologies can actually deliver. Like what is the cost of transactions in the distributed ledger system, compared with correspondent banking, say? Or what settlement times can they achieve? And, last but not least, are they equally secure?

Measured in terms of the high hopes placed in these technologies, these may come across as rather banal and sober questions, but at the end of the day, these aspects will determine whether digital solutions will be competitive or not. Only once we have found satisfactory answers to these questions, will we perhaps be able to move on to the next pressing question - whether these technologies will actually make financial services more accessible and revolutionise the role of banks.

But there's one thing we should not forget. Trust will continue to be paramount in tomorrow's financial business, just as it is today. Only providers who can build up and retain confidence will be rewarded with long-term success.

Ladies and gentlemen,

thank you for your attention.