An interest in macro prudential policy is part of what Tomasso Padoa-Schioppa has called the “genetic code” of central banks. Throughout their history central banks have aimed to ensure the overall soundness of the financial system and this followed naturally from their basic functions. Three historical developments were the key to this. In the beginning central banks were first and foremost banks – and like any bank they needed to consider the soundness and creditworthiness of their clients as well as factors in the general trading environment that might cause them losses. Second, over time, central banks developed a monopoly over ultimate liquidity, the means of final settlement, and they facilitated the settlement of inter bank payments through the rediscounting of commercial bank assets and the collection of reserves in the form of bank deposits. Third, as commercial bank money progressively developed into a larger share of the money stock, the value of money became dependent on the soundness of commercial banks. In this environment the concern of the central bank for the orderly functioning and stability of the banking system arose from the need to maintain the public goods of a stable means of payment, a unit of account and a store of value. This included last resort lending when commercial banks suffered from liquidity strains. This historical development meant that by the end of the nineteenth century, or by the early years of the twentieth at the latest, central banks’ concern for financial stability was an already well-established part of their function.

In Australia, for example, the 1998 Payment Systems (Regulation) Act gives the RBA powers to regulate the payments system and purchased payment facilities (such as travellers’ cheques and stored value cards). It also allows the RBA to obtain information from payment system participants and to set access regimes and determine risk control and efficiency standards for designated payment systems. The RBA’s responsibilities in this regard are discharged by a Payments System Board. The adoption of Real Time Gross Settlement (RTGS) has been another key risk reduction initiative on the part of many central banks in the past decade and a half. These systems eliminate the build up of settlement exposure and Herstatt risk between financial institutions as a result of the exchange of high-value payments and debt securities settlements. Instead, individual transactions are settled in real time across accounts at the central bank. The availability of RTGS is also an important step in dealing effectively with foreign exchange settlement risk. Finally, no discussion of payments system oversight would be complete without some mention of AntiMoney Laundering initiatives. AML is important for the integrity of payments systems, and thus also has important macroprudential implications. The publication of a Financial Stability Report is the second way in which central banks have given more prominence to their macro prudential responsibilities. The Bank of England was among the first movers and its Financial Stability Report is now a decade old. The report recently underwent a revamp reflecting how rapidly this type of analysis has evolved in that time.