The Assessment Methodology and Assessment Experience
A CPSS assessment of core principles seeks to identify the strengths and weaknesses of the SIPS, including its potential to transmit shocks (also originating in other countries), as well as risks to the monetary system or financial markets or across the economy more generally. The methodology for the assessment and the structure and scope of the assessment report are explained in detail in the guidance note prepared by the IMF and the World Bank in consultation with CPSS (IMF and World Bank 2001). It contains guidelines for the assessment of the individual core principles by providing a short explanation and the assessment criteria, as well as additional aspects that should be evaluated in this context. Ideally, before an assessment takes place, the central bank of the country first provides a list of systems in the country that are deemed systemically important and then conducts self-assessments of those systems. The self-assessments are reviewed by the assessor, and they provide a basis for the discussions with the stakeholders in the payment system such as the central bank, system provider(s) in case systems that are privately operated, and any relevant governmental and private sector entities (including bankers associations, card companies, clearinghouses, and securities market operators).5
Experience with assessing the core principles of the CPSS has shown that the principles provide a useful and robust framework for assessing the reliability and efficiency of SIPSs and formulating policy recommendations (see IMF 2002). The assessments suggest that there are substantial weaknesses in many payment systems. Payment systems in advanced economies and, to a large extent, in transition economies observe most of the core principles. In developing countries, a significant majority of the systems suffers shortcomings of varying importance in design and operation that may expose the systems to risks in the events of a problem.
In many systems, the awareness of risk and the possibilities for the participants to manage and control those risks are insufficient. A significant majority of the net settlement systems have no adequate safeguards in place to ensure the timely completion of daily settlements in the event of a default. Nearly 70 percent of all systems give evidence of an uncertain legal basis, mainly from the absence of legal recognition of netting and finality, and from unclear rules and regulations governing the systems. The effectiveness of the governance structure could be improved in more than 60 percent of the systems. In around half of the systems, the operation reliability is not addressed in full and may
be vulnerable to failures that can prevent the daily settlement from being completed in time. Assessment of transparency of central banks’ policy on payments shows that the objectives and institutional framework for oversight are not always transparent and that some central banks do not disclose the general policy principles for the oversight of payment systems.
The assessments, as appropriate, recommend changes or reforms to the SIPS. They also help make the authorities aware of those aspects of their SIPS that should be kept under review as the economy and financial markets develop. In practice, some assessments have used the core principles as a basis for more widely assessing the whole payment infrastructure of a country and the risks arising from interrelation between various payment systems (IMF 2002, p. 7, paragraph 12). While such wider assessment may be helpful, especially in developed financial systems where there are links between several systems domestically and sometimes abroad, a decision to assess the whole system must take into account the resource intensity of also assessing systems that are not systemically important.
The level of observance of the CPSIPS in the countries assessed highlights some key policy areas that require attention in many payment systems. The requirements to ensure prompt final settlement on the day of value (CPSS Core Principle IV) and the need to settle a net settlement system even if the largest single obligor fails (CPSS Core Principle V) were not fully observed in many countries that were assessed. This weakness was compounded by legal uncertainty, weak governance, and insufficient operational reliability in a significant number of countries. In light of this, policy recommendations have focused on the following:
• Reviewing procedures to deal with settlement problems, including loss-sharing and risk control systems, information to system participants, and provision of intraday liquidity
• Strengthening bankruptcy law (including the laws on bilateral and multilateral netting), ensuring finality of payments, and clarifying laws on pledges and collateral
• Establishing backup processing sites and testing contingency procedures, including procedures against potential liquidity problems through cross-sectoral and crossborder exposures
• Establishing transparent access criteria and reviewing cost structures and pricing policies, including full cost recovery, to improve efficiency
Assessments have also highlighted factors that could have potential negative impacts on the liquidity situation in payment systems in different countries. This negative impact is the result of (a) arrangements for resolution of troubled banks, (b) nontransparent systemic liquidity arrangements provided by the central bank, (c) liquidity that is concentrated among only a few of the banks in a country in which there is currently no intraday liquidity available from the central bank, and (d) settlement risks in the securities and the foreign exchange markets caused by the lack of DVP and PVP facilities, respectively. In many countries, it is implicitly assumed by most participants that the central bank would, in practice, cover liquidity shortages, even failures, to avoid any systemic effects (IMF 2002, p. 4, paragraph 4).