8.4.1. Affect on monetary policy implementation
The supply of intraday credit is generally believed to have no implications for monetary policy since such credit has to be repaid before the end of the day and thus intraday liquidity conditions have no bearing on the overnight (or longer-term) interest rate. Central banks, by charging above market rates and/or penalty fees for overnight borrowings, have made it uneconomical for borrowers to turn intraday credit into overnight credit simply as a result of a failure to repay the intraday credit at the end of the day. If however there is a spillover into overnight credit, there could be an affect on the monetary aggregates.
The potential risk for an intraday borrowing to spill over into an overnight borrowing at the central banks should not be higher than it is today. Overnight (discount window) credits may be extended only at the central banks discretion and are therefore limited. The central banks can request information regarding the reason for the spillover from the respective commercial bank as they would do today if a bank approaches the central bank for overnight credit. The central banks role as monetary authority and lender of last resort would remain unchanged.
It is possible that a Cash Collateral Pool Model or a Central Bank Guarantee Model could shift responsibility for providing domestic liquidity away from the domestic central bank and onto a foreign central bank providing the guarantee. However, such a shift in responsibility should not occur as long as the away central bank retained full discretion as to how much liquidity it provided to participants with a guarantee from a home central bank. Likewise, home central banks should not be obliged to provide liquidity up to the full amount of the guarantee, or even provide any guarantee, so that market participants do not become reliant upon the guarantees and that some of the responsibility for providing intraday liquidity shifts between central banks.
8.4.2.Competitive effects in private financial markets
An important area of policy interest is the impact of a cross-border collateral pool facility on competition in the private financial markets. One of the reasons for interest in cross-border collateral pool facilities is the fact that they could help to level the playing field between domestic and foreign participants by reducing the cost to foreign participants of providing collateral for intraday liquidity.71 Another advantage to many banks is that it will make
71 One of the guiding principles behind the development of the Eurosystem correspondent central banking model
(CCBM) was that counterparties should be treated equally with regards to the use of collateral to obtain central bank liquidity
available collateral on their balance sheet work more efficiently and lead to higher safety as many banks could more easily create liquidity in a specific market.
One of the concerns could be that a cross-border collateral pool facility could most benefit the largest global financial institutions, which are self-clearing in many currencies and maintain large amounts of home currency collateral (cash or securities) to leverage in away markets for liquidity. This concern could be mitigated if limits were imposed on its overall use – perhaps in time other than market stress- or if banks that self-clear in the own market only, or limited markets, could make indirect use of the facility (see Section 9 ). However a cross-border collateral pool facility could remove a barrier to smaller banks being able to self-clear in foreign markets, where today that may have limited access to intraday liquidly. This could increase competition in domestic payments markets with smaller banks serving as new entrants. Further, a cross-border collateral pool facility would facilitate the management of liquidity and improve competition in other fields (e.g., loan syndication, securities clearing) where lead managers and custodian banks have competing demands on their liquidity.
A possible concern with the Third-Party Agent option under a Securities Collateral Pool Model is that it might serve to give an individual ICSD an unacceptable degree of monopoly power or competitive advantage in the market. This concern could be eliminated by central banks relying on the services of more than one ICSD. There could also be competition policy consequences if participants from some countries were able to make greater use of a CCP facility due to the time zone differences.
8.4.3. Acceptability of service from individual central bank perspective
The Task Force recognizes that individual central banks would be concerned with the way the various cross-border collateral pool facility service options might alter their roles of monetary authority, financial system supervisor or overseer and provider of liquidity. As such the Task Force gave consideration to whether any of the models might raise difficult policy issues for individual central banks such as: required legislative and policy changes; implications for central bank supervision or oversight; implications for the role of the central bank as liquidity provider; likely shifts in the loci of financial activity; and the required degree of coordination and sharing of confidential information.
• Required legislative and policy changes. In most instances, individual central banks should not be required to seek legislative and/or policy changes as a cross-border collateral pool facility service would be consistent with current central bank credit provisioning. However, in certain jurisdictions there may need to be changes in local law or regulation to allow central banks to accept foreign currency as collateral as part of its payment systems liquidity policies or changes in local law or regulation to allow central banks to issue and/or accept “guarantees” from other central banks. This may be the case in Europe where current ECB regulations stipulate that European central banks may only accept euro-denominated collateral or collateral in other European currencies as part of their credit provisions. In some countries, e.g., Japan, there may need to be changes to withholding tax laws so that collateral may be used effectively cross-border.
• Implications for central bank supervision or oversight. A cross-border collateral pool facility is fairly straightforward as far as a supervisor policy is concerned – none of the three CCP facility models would have a fundamental difference compared with the situation where
cross-border collateral transactions take place without the benefit of these services. The existing supervisory relationships between central bank and local market participants would remain the same. The away central bank i.e., the liquidity provider, should always be able to control/limit the amount of intraday credit it will provide and the acceptable terms for the cross-border collateral pool arrangement.72 A possible concern could arise over the role of a common third-party agent i.e., which central banks would have oversight of these entities. However this would be no different that situations today where a utility is providing global services to market participants e.g., CLS Bank, Euroclear, Clearstream under the current supervisory regime.
• Implications for the role of central bank as liquidity provider. The fundamental role of central banks as liquidity providers should not change with the institution of a cross-border collateral pool facility.73 Except in the case of the Federal Reserve, it is policy for all the G- 10 central banks to provide unlimited amounts of intraday liquidity as long as such credit is secured by acceptable collateral assets. However, the Federal Reserve maintains a policy whereby intraday credit is generally not collateralized and has maintained a policy preference of seeking to reduce/contain the levels of overall intraday credit it provides to market participants. Therefore the adoption a cross-border collateral pool facility by the Federal Reserve may require the U.S. central bank to alter its procedures to allow for more general use of collateral for intraday overdrafts.74 In addition, it is possible that a cash CCP facility
could result in an increase in daylight overdrafts in Fed accounts as commercial banks in the U.S. replaced foreign (i.e., non-U.S.) securities on their balance sheet with Fed daylight credit to collateralize intraday liquidity needed at central banks outside the U.S.
• Likely shifts in the loci of financial activity. One possible shift in the location of financial activity that could result from cross-border collateral pool facilities is that certain participants might reduce their holdings of securities in certain jurisdictions as they look to reduce the portfolio costs of maintaining collateral. This may raise concerns for certain government authorities over a possible sell-off of sovereign debt, resulting in a material reduction in the price of these assets. However any such action should not occur in mass or simultaneously and the net effect would be enhancing the overall efficiency of global payments systems. In the event market participants could utilize foreign currency from other than their home jurisdiction as collateral, one concern might be that commercial banks could possibly arbitrage central bank liquidity facilities. Likewise the use of a common third-party agent should not shift financial activity away from other correspondent banks.
• Required degree of coordination. A cross-border collateral pool facility may or may not require coordination between central banks, depending on the model adopted. There are some facility types proposed where central banks could unilaterally establish a facility with no coordination among central banks. Other facility types would require greater levels of coordination as the away central bank would rely on the home central bank to serve as
72 And in a Central Bank Guarantee Facility, the home central bank should always have the authority to limit or
revoke any guarantees.
73 However, under a Central Bank Guarantee Facility, bearing credit risk in connection with an bank’s payment
activity in other countries would be a new development for central banks.
74 This is something the Federal Reserve recently did as the U.S. central bank now allows collateral held for
custodian, collateral management agent or provider of a “guarantee.”75 Enhanced central bank coordination would have potential advantages and disadvantages. On the one hand, the operational and information links that might be created in conjunction with a cross-border collateral pool facility, as well as the formalized relationships, could provide central banks with more accurate and timely information flows, especially at times of financial stress. On the other hand, the policy and structural interdependencies that would be required with facilities needing significant central bank coordination could delay the institution of any facility. To the extent that the G-10 central banks would want to adopt a common facility across their markets, a greater level of coordination would be required to harmonize practices.
While it was not possible for the Task Force to consider every possible policy implications for each individual central bank, is the overall view of the Task Force that the introduction of cross-border collateral pool facilities should not fundamentally affect the roles of individual central banks. It will ultimately be important for each central bank - in analyzing all the possible side-effects of each service option – to weigh them carefully against the potential risk reduction and efficiency benefits.
75 Under a Central Bank Guarantee Facility, central banks, on at least a bilateral basis, would have to develop the
framework for the issuance and acceptance of guarantees. Issues such as how would they be structured, what would be their tenure, what precisely would they cover, would have to be coordinated.
9. CROSS-BORDER COLLATERAL POOL FACILITIES: USE/IMPACT FOR