Central banks’ involvement in the oversight of payment systems arises from their core role as the systems’ settlement bank, providing the ultimate settlement asset, central bank money. This gives central banks a very direct interest in any potential systemic risks inherent in such systems. More broadly, payment systems are crucial to the functioning of the UK banking system and thus the wider financial system and economy, and it is therefore important that they operate in a way that contains risks to the system as a whole to an acceptable level. If payment systems are operated only in the narrow self-interest of their member participants, they may tend to underinvest in the mitigation of those risks. This can be countered by ensuring a broader risk perspective through central bank oversight.
This was recognized in the framework set out in the Memorandum of Understanding (MoU) with HM Treasury and the Financial Services Authority (FSA) in 1997.(1) The Banking Act 2009(2) puts the Bank of England’s oversight of payment systems onto a statutory footing.
On a recently published paper the Bank of England provides a brief overview of the relevant provisions of the Act and describes how the Bank intends to reflect these provisions in its approach to oversight. It also invites comments in relation to the draft Principles the Bank is intending to apply to recognized payment systems once the new framework is in place.
The full Bank of England paper may be downloaded at;
http://www.bankofengland.co.uk/publications/other/financialstability/oips/oips090928.pdf
