The heavenly liquidity twin : the increasing importance of liquidity risk

Liquidity and solvency have been called the"heavenly twins"of banking (Goodhart, Charles,'Liquidity Risk Management', Financial Stability Review -- Special Issue on Liquidity, Banque de France, No. 11, February, 2008). Since these"twins"interact in complex ways, it is difficult -- particularly at times of crisis--to distinguish between them, especially in the presence of information asymmetries (Information asymmetry occurs when one party has more or better information than the other, creating an imbalance of power, giving rise to adverse selection and moral hazard ). An insolvent bank can be liquid or illiquid, and a solvent bank may be at times illiquid. In the latter case, insolvency is not far away, since banking is grounded in information and confidence, and it is confidence which in the end determines liquidity. In other words, liquidity is very much endogenous, determined by the general condition of a bank, as well as the perception of it by the public and market participants. Dealing with liquidity risk is more challenging than dealing with other risks, since liquidity is the result of all the operations of a bank and it is fundamentally a relative concept which compares segments of the balance sheet on the asset and liability sides. It does not deal with absolutes, like arguably the concept of capital and it explains why there is not an internationally recognized"Liquidity Accord". This Working Paper addresses key concepts like market and funding liquidity and basic tools to address liquidity issues like cash flows, liquidity gaps and some selected financial ratios. It aims at providing an introductory guide to risk assessment and management, and provides useful and practical guidelines to undertake liquidity assessments which could prove useful in preparing Financial Assessment Programs (FSAPS) in member countries of the Bretton Woods institutions.Debt Markets,Banks&Banking Reform,Currencies and Exchange Rates,Emerging Markets,Bankruptcy and Resolution of Financial Distress

Payment systems in Latin America : a tale of two countries - Colombia and El Salvador

Payment systems include all the paper (including cash) and electronic systems a country uses to exchange financial value to discharge obligations. Financial markets rely on promptness and certainty of payment and settlement for borrowing and investing. Consumers want convenience, choice (of payment options), privacy, and low cost. Inefficiencies in payment systems cause a drag on the national economy. The authors compare trends and areas for improvement in payment systems in Colombia and El Salvador, two countries that differ in size, volume of check-based transactions, and national issues. Check standards have developed slowly in both countries, which has retarded automation, particularly in Colombia, where the volume of checks handled makes manual processing unmanageable. Both countries need stronger leadership from central banks and bankers associations; incentives to adopt common check standards; streamlined check sorting and encoding, microfilming, and manual data processing; alternative (especially credit-based) payment mechanisms and private check-processing bureaus; and settlement of stock exchange transactions through several banks, rather than one bank. The countries differ in important ways: 1) it will be easier to reach economies of scale in check processing in Colombia (which has too many local clearinghouses) than in El Salvador (which has too few). Both countries need a more balanced approach; 2) same day payments are possible in Colombia; payments in El Salvador are next day, at best; 3) financial markets are less mature in El Salvador and may not need to be as sophisticated as markets in other countries; and 4) Colombia has yet to create effective disincentives for writing checks against insufficient funds. Both countries must take certain actions to develop a system for electronic payment and the settlement of payments at the central bank: 1) draft new laws and regulations; 2) provide more systematic data collection and analysis of payment flows; 3) undertake more risk analysis and prevention in the central banks and supervisory agencies, and draft contingency plans for major failures; 4) reexamine the dual roles of the central banks and other government agencies in operating and supervising payment systems; 5) review check-clearing pricing policies; and 6) analyze the economics of automating check processing.Banks&Banking Reform,Payment Systems&Infrastructure,Financial Intermediation,Banking Law,Economic Theory&Research,Payment Systems&Infrastructure,Banks&Banking Reform,Financial Intermediation,Banking Law,Economic Theory&Research

Modernizing payment systems in emerging economies

The authors address the following questions in this overview of payment systems: What is a payment system? How can efficient systems contribute to the development of modern, market-based financial institutions and markets? What elements are necessary for payment systems to operate efficiently? What are the operational characteristics of a modern payment system? What is the World Bank approach to selected payment system initiatives, design, and development? Effective, efficient payment systems, they conclude, are vital for the economic development of emerging economies. Efficient payment systems help promote the development of commerce, enhance economic policy oversight, control the risk inherent in moving large values, and reduce the financial, capital and human resources devoted to the transfer of payments. Many emerging economies lack the financial and technical resources to develop such systems. Many turn technical resources to develop such systems. Many turn to the World Bank and other international agencies for assistance. Unfortunately, some believe that the entire solution for an effective payment system rests in obtaining modern computer hardware and believe the World Bank's sole contribution is to finance hardware costs. Hardware procurement alone will not solve problems of payment systems. These countries need organizational plans and structure for national payment systems before they spend money on computer equipment. They often lack the expertise to design and operate modern payment systems, so they may need technical assistance from financial experts before they invest in systems development. The design of a new payment system should be kept simple. Many emerging economies lack the infrastructure and banking sophistication to leapfrog from basic to state-of-the-art payment systems. The first task is to fix the most serious problems. The second is to upgrade the current systems incrementally, to meet basic standards of timeliness, security, and reliability. As these improvements are made, the countries can turn their attention to long-term, advanced solutions. Each country's payments system is unique. To simply import another country's system without adjusting for the target country's geography, infrastructure, banking and legal structures, culture, and needs could lead to suboptimal solutions. Development of the system should follow a disciplined plan for defining the needs of users and for organizing the project team and project goals.Payment Systems&Infrastructure,Banks&Banking Reform,Economic Theory&Research,Financial Intermediation,Information Technology

Brazil's efficient payment system : a legacy of high inflation

Brazil's efficient, highly automated payment system developed over many years in response to hyperinflationary conditions. The authors describe the system, its payment instruments, and its links to other networks and the government's payment and collections operations. They examine factors that have affected system development, planned innovations and improvement opportunities. The principal payment instruments used in Brazil are cash, checks, cobrancas (like European GIRO payments) and DOCs (Documentos de Credito). DOCs are used to make interbank credit payments, intrabank transfers of funds between a client's different accounts and client to client payments between parties with accounts at the same banking institution. Although they can be initiated on paper, all DOCs are electronic and processed only by banks. Networks include direct deposit and direct debit services, automated teller machines, credit cards and home banking services. The system is highly automated, with separate systems for clearing and settling checks and credit payments; government securities, private securities, state, local, and municipal securities; government payments; and foreign exchange. Among the lessons learned: a) banks can cut costs by cooperating on check processing and transportation; b) a broad, inclusive approach should be taken to modernizing the payments system, taking into account the needs of all users; and c) a wider menu of payment instruments should be offered.Financial Intermediation,Payment Systems&Infrastructure,Banks&Banking Reform,Banking Law,Economic Theory&Research,Financial Intermediation,Banks&Banking Reform,Payment Systems&Infrastructure,Economic Theory&Research,Banking Law

Deposit insurance and banking reform in Russia

The objective of this paper is not to review the pros and cons of deposit insurance systems, but to focus, rather narrowly, on the recent adoption of a deposit insurance system (DIS) in Russia, the rationale offered, and the potential impact it might have on the stability and development of the Russian banking system. An attempt is made to draw some lessons from the implementation experience in Russia. The paper starts with a brief description of the Russian DIS, followed by an overview of the banking system's structure and some observations on the sequencing followed for adopting the DIS and the political economy of its adoption. It concludes with a discussion of areas requiring attention.Banks&Banking Reform,Financial Intermediation,Financial Crisis Management&Restructuring,Corporate Law,Insurance&Risk Mitigation

La base monetaria ajustada; una nota metodológica

La prominencia alcanzada por el stock de dinero como indicador de política monetaria y de la base como meta operacional de los bancos centrales hace necesario precisar lo que ambos conceptos significan y su definición empírica.En principio, estaremos preocupados solamente por discutir los diferentes conceptos de base empleados en la literatura y en examinar algunos de los problemas de comparabilidad a través del tiempo, que se presentan de la adopción de una u otra definición. Explicaremos en detalle el método de ajuste desarrollado por Andersen y Jordan a fin de aislar el efecto de los cambios en las relaciones de encaje sobre las reservas para encaje de los bancos, y de esta forma permitir la comparación de la base bajo diferentes valores del encaje legal dispuesto por la autoridad monetaria. Una vez hechos estos ajustes presentaremos la serie histórica de la base monetaria ajustada para Colombia desde 1949. Finalmente discutiremos las implicaciones para el multiplicador de los medios de pago del ajuste hecho a la base

Los indicadores monetarios tradicionales y la liquidez de la economía

Una de las preocupaciones más recientes de las autoridades monetarias se refiere al grado de confianza que se le puede atribuir a los indicadores monetarios tradicionales (M1, M2 y B) como guías de política. De ahí que sea esencial estar seguro del significado de dichos agregados a la luz de los objetivos que persigue la autoridad monetaria.El propósito del presente documento es el de examinar los esfuerzos que se han hecho para determinar la naturaleza y la magnitud de las distorsiones sobre las variables monetarias, particularmente aquellas que se discuten en el documento de trabajo titulado "Los controles administrativos y las variables monetarias" y sugerir nuevos procedimientos y definiciones que conduzcan a un análisis más sistemático del problema ya que, como se discute más adelante, es poco probable que las medidas sobre encaje y tasas de interés recientemente tomadas por la Junta Monetaria eliminen las distorsiones que se han venido observando en los estados financieros de los bancos y corporaciones y por ende en los agregados monetarios tradicionales

La deuda comercial externa a corto plazo

El presente documento está dedicado al análisis de una de las principales fuentes de financiación de las importaciones colombianas, esto es, los préstamos otorgados por los establecimientos de crédito del exterior. En primer término se discute la evolución reciente de este tipo de endeudamiento; en segundo, se estima la estructura de pagos de las importaciones reembolsables (giro ordinario y Plan Vallejo); y, finalmente, se discuten los nexos entre el sector externo y el manejo monetario. La descripción del manejo del crédito externo de corto plazo se hace en forma bastante minuciosa, para dar una idea cabal de todos los elementos que deben tenerse en cuenta al considerar este tipo de financiación, los cuáles indudablemente afectan la estructura de pagos al exterior, además de los diferenciales entre las tasas de interés internas y las de los mercados internacionales de capital a los cuales se hará referencia más adelante

Cost recovery and pricing of payment services

A modern payment system is essential for promoting domestic and international trade and exchange as well as developing financial markets. Payment users will be directed toward the most efficient payment methods when the costs of producing those services are reflected in the prices paid. Resources are being wasted in the United States because consumers see no important difference in transaction prices or bank costs between using a check or using electronic direct debit in paying a bill, even though the social costs of these two instruments are different. Electronic payments cost only a third to half as much as paper-based payments. An estimated $100 billion (or 1.5 percent of GDP) is being lost by the continued use of paper-based checks. When payment instruments are not appropriately priced, the costs must be covered elsewhere. One common solution is to let loan revenues cover part of payment expenses (keeping loan rates higher to compensate). When prices reflect the full cost of producing the service, users demand the services that use the fewest real resources. The authors give examples of payment prices and price schedules and show how underlying cost data are used to"build up"to a price. They outline how payment services may best be structured to: a) Appropriately reflect economies of scale or scope in the production of payment services; b) Adjust cost recovery percentages to accommodate how much demand conditions associated with start-up differ from those associated with mature operation. (During a new system's early years of operation, the transaction volume may be low and some form of underrecovery of costs may be required to encourage use of the system. But any such underrecovery must be built into future pricing arrangements oncethe systems are established and traffic volumes are at a level where full cost recovery is practical. To ensure fairness, the pricing structure must also guarantee that latecomers to the system not get more favorable treatment than the initial user group.); and c) Induce efficient use of scarce resources. They note the economic principles that recommend certain pricing methods over others and apply equally to payment services provided by the private sector or through a government agency. They show why costs should be recovered through user transaction fees.Banks&Banking Reform,Payment Systems&Infrastructure,Economic Theory&Research,Markets and Market Access,Decentralization,Payment Systems&Infrastructure,Economic Theory&Research,Banks&Banking Reform,Environmental Economics&Policies,Markets and Market Access

La cuenta especial de cambios y la base monetaria

El presente ensayo tiene por objeto analizar algunos aspectos de la Cuenta Especial de Cambios (CEC), en particular, sus implicaciones monetarias. Para esto se discrimina su saldo en lo que es propiamente efecto monetario (crédito a la Tesorería General) y lo que representa efectos contables (ajuste cambiario).El trabajo también desarrolla una metodología para el ajuste de las cuentas en moneda extranjera del Banco de la República; este aspecto que se presenta hacia fines de año por el cambio en la tasa de contabilización de reservas (TCR) no tiene efectos monetarios pero sí repercusiones en la composición de la base monetaria