Including new players in stress-testing the system is challenging and requires cooperation and timely transparency. Many of these new players are non-banks. It is therefore important to look at the role of non-banks in payment and settlement systems. Payment, clearing and settlement services have traditionally been offered by banks and non-banks alike. The coexistence of banks and non-banks raises some important regulatory questions. In fact, while there is a trend towards common regulatory standards, banks would typically argue that they are subject to prudential supervision and that there is no need for further regulation. In contrast, non-banks would argue that common regulatory standards should apply to all relevant service providers in order to ensure a competitive level playing-field. In the end, the question is whether the approach to regulation should be based on functions or institutions. Finally, the globalisation of finance has resulted in the expansion of cross-border financial linkages. An implication of globalisation is that financial distress is more likely to have farreaching cross-border effects. This is a natural consequence of the tighter cross-border linkages that have formed. Such effects are almost guaranteed if distress were to involve one of the global players that operate across so many countries and underpin the smooth performance of so many markets. In fact, over 30 years ago, even the failure of a small bank active in FX transactions was sufficient to have significant cross-border ramifications – so significant as to act as a catalyst for the establishment of the Basel Committee on Banking Supervision.
This reflects first that unlimited liquidity facilities provide banks with a buffer against liquidity shocks and thereby contribute to financial stability. Second, it however also reflects the need for sound credit risk management by the central bank, which argues against unsecured lending, in particular at overnight and longer maturities. This framework – of unlimited access to intraday and overnight central bank credit against eligible collateral – implies that collateral availability becomes the ultimate liquidity issue for banks. As long as banks have sufficient eligible collateral for overnight or intraday credit, they have a buffer against liquidity shocks. Once a liquidity shock exceeds the eligible collateral, a major liquidity issue arises, and the bank may fail to fulfil its payment obligations, with all the serious consequences that this has for the bank itself and, via knock-on effects, potentially for the entire financial system. This is what makes collateral availability so important today as a contribution by central banks to financial stability – again, both intraday, i.e. for payment purposes, and for overnight credit. Let me now turn briefly to the recent financial market developments, which involved, as you know, partially a shortage of credit, but eventually also a significant drying-up of liquidity. It was not a failure of the payment system, as all payment systems worked smoothly. Nevertheless, let me say a few words here.