Central bankers call for action to tackle potential contagion in the global financial infrastructure

In a report published today by the Committee on Payment and Settlement Systems (CPSS), central bankers recommend a number of actions to address the risk-transmission channels brought by system interdependencies. The report, The interdependencies of payment and settlement systems, raises concern that the speed and multiplicity of potential disruption channels across the global payment system are not adequately reflected in stress-tests, risk controls, contingency funding plans, and crisis management procedures.

The report documents how globalisation and other long-term developments have made the network of domestic and cross-border systems underpinning financial markets more interconnected. Although these interconnections bring many compelling benefits, they also create risks and vulnerabilities which need to be addressed.

"Systems underpinning global financial markets are becoming more interconnected in increasingly complex ways", said Timothy F Geithner, President of the Federal Reserve Bank of New York and CPSS Chairman.

The report lays out a framework for analysing the risks of interdependencies, along with specific recommendations for the industry to address them. For instance, the report calls for more sophisticated business continuity testing practices that include interdependent parties on a national and cross-border basis.

The report also recommends that central banks and other authorities review their policies in light of the increasingly integrated nature of the global financial infrastructure. Furthermore, the CPSS will review and, where necessary adapt, its internationally recognised standards for the management of payment and settlement risks, especially operational and liquidity risks, to reflect the evolving challenges posed by interdependencies.

"Recent market conditions emphasise how important it is that the settlement infrastructure supporting financial markets is robust and reliable, even in adverse circumstances", Mr Geithner concluded.

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The report was developed by the CPSS working group on system interdependencies, chaired by Denis Beau, CPSS Head of Secretariat.