Rationale for overseeing payment and securities settlement systems
In the context of payments and securities settlement, the Bundesbank acts not just as an operator of payment systems and as catalyst for desired changes on the market, but is also entrusted with the task of overseeing payments and financial market infrastructures.
Financial market infrastructures such as payment systems, central securities depositories and central counterparties are essential components of a functioning financial market. They support the real economy, for example through the secure and rapid settlement of payments, and can transmit monetary policy stimuli – for instance, by ensuring reliable interbank payment transactions. If not properly operated, they can give rise to risk affecting the entire financial system. Furthermore, financial market infrastructures may serve as a channel of contagion for other financial market participants in the event of a crisis. It is therefore in the interest of central banks to ensure these infrastructures operate in a secure and efficient manner. Their oversight has become a new central bank function over the past two decades.
Payment instruments, such as payment cards, credit transfers, direct debits or e-money, also play a key role in the real economy. Their security is thus essential in ensuring the general public’s confidence in the currency. For this reason and given its mandate in the Eurosystem, the Bundesbank is also charged with overseeing payment instruments. Furthermore, the Bundesbank’s oversight activities also encompass banks’ correspondent banking business and critical service providers for infrastructures and banks. For instance, the Bundesbank is involved in the oversight of communication service provider SWIFT (short for Society for Worldwide Interbank Financial Telecommunication).
By rigorously pursuing the goals of security and efficiency, oversight contributes to ensuring financial stability, implementing monetary policy and maintaining the general public’s confidence in the euro. Chief responsibility for security and efficiency always lies with the respective operator or service provider; the Bundesbank merely keeps a check on procedures. The oversight function, does not, however, extend to prevention of money laundering and terrorist financing or to data and consumer protection; these activities are carried out by other public sector entities in Germany.
The legal basis for oversight activities is enshrined in Article 127(2) of the Treaty on the Functioning of the European Union and Article 3.1 of the Protocol on the Statute of the European System of Central Banks and of the European Central Bank (Statute of the ESCB), under which the ESCB is inter alia mandated “to promote the smooth operation of payment systems”.
Article 22 of the Statute of the ESCB provides an additional legal basis. According to this, the ECB and national central banks may provide facilities, and the ECB may make regulations, to ensure efficient and sound payment and settlement systems within the currency union and with other countries. This task is also reflected in Section 3 of the Bundesbank Act (Gesetz über die Deutsche Bundesbank) which states that the Bundesbank “shall arrange for the execution of domestic and cross-border payments and shall contribute to the stability of payment and clearing systems.”
In order to verify and ensure that the oversight objectives are achieved, standards for the monitoring of individual infrastructures and payment instruments have been developed for use in assessing systems and operators.
Since April 2012, the Principles for Financial Market Infrastructures (PFMIs) have provided the basis for monitoring financial market infrastructures. Drawn up by the Basel Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO), the goal of these principles is to improve the stability and resilience of financial market infrastructures. The 24 principles of the PFMIs align, tighten and add new aspects to the international recommendations which have so far applied to financial market infrastructures and now form the basis for various European regulatory approaches.
The Eurosystem developed its standards for the oversight of payment instruments independently of the PFMIs. The Bundesbank applies them to the joint monitoring of payment instruments deployed internationally as well as to oversight at the national level.
Distinguishing oversight from banking supervision and system operation
A general distinction should be made between the central bank function of oversight and the supervision of credit institutions as conducted by the European Central Bank, Bundesbank and Federal Financial Supervisory Authority within the meaning of the German Banking Act. In contrast to this form of supervision, which investigates individual credit institutions and credit institutions as a whole and carries out detailed inspections of individual institutions, the oversight function of central banks focuses on settlement systems (including the respective instruments) and inspects their structure and functioning.
Supervision and oversight also differ in terms of their powers of intervention. Banking supervisors have extensive regulatory powers of intervention and instruments, while those responsible for oversight in Germany traditionally have to rely on the force of their arguments. However, with respect to those system operators and agents, such as the German central securities depository, German central counterparties and correspondent banks, which are additionally subject to prudential supervision, supervisors can lobby the relevant supervisory authorities to achieve a change in behaviour.
Running independent payment and securities settlement systems is a further important task of some central banks. In order to avoid any potential conflict of interest, these central banks are required to keep the operation of internal infrastructures and their oversight separate in organisational terms. Within the Bundesbank, responsibility for oversight lies with the Directorate General Payments and Settlement Systems. Operation of the Retail Payment System (RPS) and involvement in running the TARGET2 system for high-value payments fall within the remit of business units in the same directorate general, albeit in different divisions with separate reporting channels.