Recent developments in intraday liquidity in payment and settlement systems

Alongside consolidation and globalisation of the financial markets, the increase in values exchanged in payment and settlement systems has been remarkable. The size of intraday liquidity requested to expedite settlement of such values is accordingly very significant, especially compared to overnight or longer term liquidity. The increasing use of risk control arrangements in payment and settlement systems (e.g. real-time gross settlement) is typically associated with higher liquidity needs, which have been balanced by the parallel development of several forms of liquidity saving features in systems. The most remarkable developments have affected the qualitative management of intraday liquidity. A clear trend illustrated by continuous linked settlement (CLS) is the shortening of the time horizon in intraday liquidity management. On the “supply” side, intraday liquidity can be provided by central banks or commercial banks, depending on the settlement asset used by systems. Since most central banks extend credit only against collateral, the type of assets that participants can use is an important factor in determining the opportunity costs of intra-day liquidity. In the past decade, most central banks have substantially broadened the range of collateral they accept in their provision of liquidity. Furthermore, an interbank intraday liquidity market seems to start emerging in relation with concentration of correspondent banking activities and funding costs related to critical time windows. Developments affecting intraday liquidity management need to be adequately considered from a financial stability perspective. Liquidity risk profile has changed alongside a variety of factors including consolidation which has led to a concentration of intraday liquidity risk and the development of interdependencies in payment and settlement systems. One lesson to be drawn from the recent period is the usefulness for central banks, to have a list of eligible assets that is diversified enough to address an unexpected increase in collateral demand, in order to mitigate the consequences of a financial turmoil. Over the past decade, the relevant actors, including the banking sector, central banks and the banking supervisors have taken various initiatives to better approach the diverse challenges raised by developments in intraday liquidity. Central bank policy responses encompass the provision of new settlement services which allow to optimize intraday liquidity management of banks (e.g. the new TARGET2 platform), the adaptation of their collateral policy to the new landscape of interdependent payment systems and oversight initiatives to better monitor and address changing risks.