Mr. Hartmann discusses the introduction of the euro and its impact on
Speech by Mr. Wendelin Hartmann, a member of the Directorate of the
payment systems
Deutsche Bundesbank, at Sibos Helsinki, Closing Plenary Session on 24/9/98.
It is a great honour for me to say a few words, here at this major conference, on
the forthcoming, important changes that will accompany the introduction of the euro.
We are all aware that payment systems have long since moved from the seclusion
of pure settlement arrangements to become the focus of political and strategic attention. It is not
just a question of payments to settle the cost of economic activities. Much greater importance is
attached to financial transactions in particular; over the past few years they have grown at a
furious pace - not least as a result of globalisation and technological progress. The establishment
of efficient and, above all, - as far as possible - risk free payment systems is therefore a necessity.
Payments will also play a significant role in the introduction of the euro: a major
part of the preparations undertaken by the banks and central banks in Europe deals with that area.
European economic and monetary union (EMU) will undoubtedly transform the payments
landscape in Europe and - as a result - worldwide.
What is indisputably the most important project for the European central banks is
the introduction of TARGET - meanwhile well known to the financial industry world-wide
which has been in the simulation phase since July of this year. The tests are proceeding
satisfactorily overall and give cause for optimism; the credit institutions are now actually
involved in all the countries of the European Union (EU).
The most recent decision of the Governing Council of the European Central Bank
(ECB) to include the four EU countries not (yet) participating in EMU has also settled the last
undecided points which were the subject of animated discussion in the past. Confirmation has
been given that the RTGS systems of the "out" countries will be connected to TARGET but that
they will be subject to special conditions regarding the provision of liquidity. The "out" central
banks may maintain interest-bearing deposits with the European System of Central Banks
(ESCB) and initiate payment orders from them. However, they may not receive
non-interestbearing overdrafts from the EMU-central banks, a facility for which there is provision in the
settlement of TARGET payments for "in" central banks. The "out" central banks may grant a
maximum intraday credit of 1 billion euros per bank to credit institutions in their euro RTGS
systems against the deposit of appropriate collateral. Spilling over into an overnight credit and
the associated monetary policy implications are to be prevented by repossession of the intraday
credit at an earlier closing time and the setting of high penalty rates.
I would like to venture a brief look forward to the future payments landscape in
Europe.
Features of foreign payments
Owing to the comparatively small number of cross-border transactions, there has
so far been no real pressure for rationalising foreign payments. Most cross-border payments are
still settled through a large number of correspondent banking relationships and, typically, with a
two-day value date. Apart from the exchange of SWI.F.T. messages, very little is standardised
there are only the beginnings of a standard international bank code, for example. Complicated
pre-printed forms and statistical reporting obligations make a simple exchange of payments more
difficult. However, this should not be regarded as an excuse for the existing shortcomings in
cross-border payments, such as long settlement times and high charges still mainly occurring in
the retail segment. In the euro area, these differences when compared with the efficient and
costeffective operations of the national systems will become very obvious and create political
pressure on us all. In the interests of a fully functional European market, foreign payments will,
at all events, need further improvements.
Large-value payments
As a result of their importance for monetary policy, large-value payments are
especially "close to the heart" of the central banks. In order to guarantee a single money market
and the necessary interest rate arbitrage in Stage Three of EMU, it will be necessary to settle
payments - including cross-border-payments - not just within one business day but, where
possible, within a matter of a few minutes. The TARGET system which has been developed by
the central banks is thus the key medium for implementing the single monetary policy and an
efficient euro money market.
TARGET will not be the only large-value payment system in the EU, however.
Net settlement systems, too, may continue to operate if they meet what are known as the
Lamfalussy minimum standards and settle payments through central bank accounts. Thus, the net
settlement system of the Euro Banking Association (EBA), which still settles transactions in
private ECU, is being re-equipped to process euro payments in future. In addition to this
crossborder system, there will be other national net settlement systems: SNP in France, the Madrid
Clearing House in Spain, the Finnish POPS system, and the LIPS system in Luxembourg. The
German EAF (Electronic Access Frankfurt) combines the positive elements of gross and net
settlement systems. As a hybrid system, it will thus provide - also after the euro has been
introduced - what is, in our view, an optimum combination of early finality of payments and
liquidity saving, as will CHIPS in New York in the future.
The distinction between cross-border and national payment systems will
fundamentally become less important. Firstly, all systems will process the same currency - the
euro - in future. Secondly, national systems will become increasingly international in character as
a result of the expansion of the group of participants. Foreign banks, both from the EU and from
third countries, will be able to participate in domestic systems through their branch offices or use
the option of remote access without even having a local presence. Along with other central
banks, the Bundesbank has been opening its large-value payment systems for remote access
worldwide since the beginning of this year and offers interested banks indirect participation with
their own clearing address. There has been a great response to this international stance, especially
from outside the EU area.
The large number of different payment systems and the various forms of access
will inevitably lead to fiercer competition among the systems and thus among financial centres.
There are some who regard the coexistence of the various payment systems as problematical on
the grounds that it will make liquidity management more difficult. Since the transaction currency
will no longer be the major factor determining the channel of payment, they fear that the situation
in Europe will be - to quote from the Financial Times - "at best a mess, at worst chaos"1. This is
a view which I am totally unable to share.
On the contrary, I regard competition as fundamentally desirable in this respect,
too, since it is likely to lead to payment systems being organised in a more efficient and
costeffective manner. This statement also applies without qualification to the systems operated by the
central banks (TARGET and EAF). That is because, just as the commercial banks operate their
systems, such as EBA Clearing or SNP, without gainful intent, the central banks work theirs
according to the principle of full cost recovering. The costs structure is regularly examined by
independent auditors, for example. The Directorate General of the EU Commission responsible
for issues relating to competition ensures that the EU central banks do not operate an unfair
charges policy.
Besides charges, it will, above all, be quality features, such as speed and freedom
from risk, that will play a crucial role in the choice of the payment channel. The TARGET
system established by the central banks will settle large-value payments extremely efficiently in
real time and with immediate finality. In the view of the central banks, this system should
therefore be used for time-critical and very large payments, particularly for transactions in
connection with money and foreign exchange market operations. This would make a
considerable contribution to the EU-wide reduction of systemic risks.
One further advantage of TARGET is its comprehensive market coverage - almost
all credit institutions in the EU will directly be accessible via TARGET. This will also enable
institutions outside the EU to restructure and/or streamline their correspondent banking
relationships with a view to gaining access to the euro area, since they will generally need only
one link into the euro area for access to TARGET. Net settlement systems, such as EBA Clearing
or the hybrid system EAF, tend to be geared more to a limited number of direct or indirect
participants; other banks can be reached only through correspondents. These systems provide the
particular advantage of liquidity saving, but do not ensure the finality of payments in real time.
For that reason, they will probably be used for payments of lesser importance but with same-day
settlement.
I therefore regard the coexistence of gross and net settlement systems as quite
consistent with market requirements. One of these two types does not necessarily have to
displace the other. Rather, they are complementary. Participants in payments will thus have the
option of deciding which system is the more suitable in a given situation depending on the
purpose and size of their payments.
The choice of the payment channel will therefore depend on customer needs. I feel
that cartel agreements in the banking industry or regulation by the central banks are unnecessary.
Even the "Heathrow Group", a grouping of 31 clearing banks, has arrived at the conclusion that
there ought be no binding regulations on the use of certain payment systems. Instead, the existing
principle of the channel of payment being agreed bilaterally or multilaterally between the credit
institutions involved should be maintained. Standard Settlement Instructions (SSI) are helpful in
this but must not lead to cartel agreements and thus clash with fair competition.
Despite all the optimism in respect of the major function of competition, it should
not be forgotten that there must be a given volume of payments overall in order to ensure the
viability of several coexisting large-value payment systems. According to a 1996 estimate by the
EBA, a daily volume of between 318,000 and 473,000 crossborder commercial and financial
payments in euros is to be expected from the start of next year. Furthermore, the EBA estimates
that the volume will increase by 15% to 20% by the year 2004. The actual future trend in the
volume of payments is, in my view, difficult to predict, however. The adoption of the single
currency will, at least, mean that there will be no transactions which aim at exchange rate
positioning among the disappearing European currencies, as there are now. The current efforts to
limit the foreign exchange settlement risk will have a similar impact. A significant increase in the
use of netting procedures in foreign exchange dealings or the successful implementation of the
CLS initiative might, in all probability, lead to a perceptible reduction in the number of
transactions. The possibility of excess capacity arising in large-value payments cannot therefore
be ruled out. Nevertheless, the effect might be tempered by new payment activities due to an
increase in transactions resulting from enhanced efficiency in the EU market and an increase in
the volume of payments involving third currencies. Again, the creation of the European money
market itself is likely to impart a major stimulus to the volume of transactions.
I feel there are two conceivable developments if there really is excess capacity.
Firstly, it might become necessary to close down individual systems because of a lack of
sufficient use. Secondly, I could also well imagine that spare capacity might increasingly be used
to settle retail payments, too, in the new, efficient large-value payment systems.
Retail payments
This would give a considerable boost to cross-border retail payments in Europe
since these still do not meet the requirements of the single market in terms of speed, efficiency
and cost.
A survey that was recently conducted in Frankfurt, for example, showed that the
settlement of a cross-border payment still takes between 2 and 14 days and that a transaction to
the equivalent value of around 800 euros costs 10-30 euros. If these costs are compared with
those of the large-value payment systems, it becomes clear how much catching-up is still to be
done in the area of retail payments. Depending on the amount submitted, a TARGET payment
will cost no more than 0.80-1.75 euros. The EBA and the EAF will charge 0.25 and 0.15 euros,
respectively, per transaction.
In my opinion, the banks have failed to eliminate these long-familiar shortcomings
at the right time. A few years ago, in fact, there was a promising initiative to make retail
payments more efficient and, above all, cost-effective by means of the ACH (Automated
Clearing House) solution. The ACH approach would have offered the advantage of there being
only one link for cross-border payments per country. Unfortunately, this solution was sacrificed
to the short-term interests of the banking groups. The totally unsatisfactory level of technological
standardisation in Europe has remained largely unchanged.
Instead, individual groups, such as the cooperative and savings bank sector, have
now established their own linking systems. In terms of efficiency and cost, these initiatives are
not enough, however. Rather, technological diversity has resulted in settlement that is
uneconomic in the long term. The situation is unsustainable - especially in the light of the
costeffective settlement of large-value payments - and is likely to call the consumer protection
associations into action again. The banking industry must seriously consider how substantive
improvements can be achieved.
In my view, this requires progress in the area of standardisation, in particular.
Linking the national retail payment systems throughout Europe has failed so far because the
national standards are not compatible with each other. The bank code has a different number of
digits in the individual countries, for example; the IBAN is only gradually gaining acceptance.
Differing standards mean that foreign payments are, in most cases, still passed on in systems that
are separate from domestic payments and encumbered with special charges. A complete
conversion to combined processing in a given country's domestic payment system is not always
possible and is also fairly labour-intensive on account of the large number of possible
combinations. It is only gradually that bridging standards are being developed for a link of this
kind, one example of which is the message type S.W.I.F.T. MT 102. These bring about a
significant reduction in the amount of work needed, since there only has to be one single
conversion from the national standard to the S.W.I.F.T. message type or, alternatively, from the
S.W.I.F.T. message type into the national standard. A complete cost-effective harmonisation
would require standardisation throughout Europe, however. The EU central banks and the
European Monetary Institute (EMI) have repeatedly drawn attention to this problem; I cite
merely the seminar on standardisation that the EMI held at the beginning of this year with
representatives of the European banking industry. The private sector still has a lot to do in this
respect. In their payments oversight function, the central banks repeatedly find themselves in the
situation of being compelled to point out the existing failings. They are also willing to take an
active part in supporting the work on European standards.
The role of S.W.I.F.T.
Naturally, whenever the subject of standardisation is mentioned, I immediately
think of our host, S.W.I.F.T.. Looking at this audience, it once again becomes clear what a major
role S.W.I.F.T. plays in terms of payment systems worldwide. We are all users of S.W.I.F.T..
And that has led, of course, to the S.W.I.F.T. formats now being more or less the only
international standard for payments between banks. A wide range of participants uses the
S.W.I.F.T. telecommunications network for international correspondent banking business.
National large-value payment systems, too, such as the Belgian RTGS system ELLIPS or TBF in
France, use the S.W.I.F.T. network for communication between their participants. By contrast,
participation in the Bundesbank's large-value payment systems, EAF and ELS, is based on
proprietary solutions; the Datex P of Deutsche Telekom AG is used for telecommunications. The
Bundesbank thus takes due account of the variety of systems operated by its customers by
providing them with open and, in the broadest terms, neutral access, to its services. This
principle is also being applied to the opening of large-value payment procedures for worldwide
remote access. Nevertheless, for those interested in remote access to EAF and ELS, we are also
developing a cost-effective access option which uses the S.W.I.F.T. network as a platform and
the customary S.W.I.F.T. standards for communication. This means that banks abroad will be
able to use their normal foreign payments procedures without additional modification work, and
this will make installation and communication easier. This solution is expected to be available
from the start of 1999.
S.W.I.F.T.'s role in Stage Three of EMU is being extended, since the EU central
banks have decided to use S.W.I.F.T. as a carrier for the cross-border TARGET system. This
means that S.W.I.F.T. has taken on an even greater amount of responsibility. In particular, this
includes the commitment to ensuring smooth and trouble-free operation. It is my belief that the
high standard set by S.W.I.F.T. in the past will ensure that the TARGET system will operate
smoothly, too. This is borne out by the first-rate spirit of cooperation and the transparency
provided by S.W.I.F.T. - not least with respect to the auditing by the Belgian central bank.
Overall, I am optimistic that SWI.F.T. will also master future challenges, such as the year-2000
problem.
Outlook
However pressing and topical the centennial project of EMU may be, the example
of the year-2000 problem makes us realise - if we have not done so already - that cooperation in
the field of payments must not stop at Europe's borders. Europe must look beyond its own
immediate concerns in order not to become isolated. The EU central banks will therefore
continue their dialogue with central banks throughout the world. The introduction of the euro
will, in any case, not leave third countries unaffected. Credit institutions outside the EU will
restructure their correspondent banking relationships and possibly find new counterparties.
Concentration on a small number of access points to the euro area will offer them the opportunity
of easier liquidity management. This will also strengthen competition between European
financial centres. Issues of this kind relating to competition also came into the, often animated,
negotiations on connecting the "out" central banks to TARGET. At times these central banks had
feared discrimination. On the other hand, they do happen to be outside the euro area and cannot
therefore benefit from all the advantages of the single currency area. Off-shore centres must play
a neutral role in terms of monetary policy - something which, in my view, made the imposition of
conditions indispensable. I believe, however, that we must not forget that these countries will one
day become fully-fledged members of EMU and that procedures will then be harmonised in any
case. In terms of the restructuring of payments in EMU and the rearrangement of business
relationships - in other words, including acquisitions - fairness should take priority over
everything else. What matters, after all, is successfully realising the joint project of monetary
union on an enduring basis.