Eventually, central bank money would no longer be seen as “safe” and this would undermine the confidence in and acceptability of the settlement asset. This brief historical overview demonstrates that the development of the core functions of central banks – monetary and financial stability – has been closely linked to their role in the provision of the ultimate settlement asset in the payment system. It is therefore important for central banks to have a thorough understanding of how these links work. Let me share some thoughts with you in this regard. Payment systems, monetary policy and central bank actions in the recent financial market developments Central banks provide liquidity for different purposes. 2 To achieve their primary objective of price stability, monetary authorities supply base money to the economy. By matching the demand for base money with the supply that they control, central banks steer short-term interbank interest rates, which, via the transmission mechanism of monetary policy, have an impact on the price level. Another objective of central banks is to ensure the smooth functioning of the payment system. Central banks provide intraday liquidity to bridge the timing mismatch between banks’ incoming and outgoing payments during the day. This not only facilitates intraday liquidity management of banks, but also makes payment gridlocks less likely and therefore contributes to financial stability. Payment systems clearly matter for monetary policy. Monetary policy implementation today means steering short-term interest rates.
Against this background, some further work needs to be done on the harmonisation of the oversight framework for securities clearing and settlement in the European Union. The continuous absence of such a harmonised oversight framework generates a number of undesirable effects. However, after the recent ECOFIN decision, I am very optimistic that we will soon see the finalisation and adoption of the ESCB-CESR recommendations for securities clearing and settlement. •  The relevance of collateral for liquidity issues has been clearly recognised by central banks. During the past ten years, central banks have – especially in the context of the Committee on Payment and Settlement Systems and other Basel committees – focused jointly their attention on the use of collateral in financial transactions,  6  BIS Review 130/2007  including the cross-border use of collateral. 4 Cooperation in this respect is very useful and, especially for emergency situations, I would think that central banks –by enabling the cross-border use of collateral – could make a positive contribution to financial stability. Ladies and gentlemen, let me now close my introductory remarks by once again welcoming you all and by thanking all of those who have been involved in preparing this conference, in particular Daniela Russo and Mark Manning. 4  CPSS report on “Cross-Border Collateral Arrangements”, Bank for International Settlements, Basel, January 2006. BIS Review 130/2007  7