International settlements: a new source of systemic risk?

Recent market developments have heightened concerns about the potential for systemic risk in the payments system. At the same time that markets are becoming more integrated and global in scope, they are becoming more segmented in the sense that there is a growing separation evolving between the clearing and settlement of transactions that raises the prospect of a need to invoke the safety net and introduces a possible distortion into the international payments system. As a consequence, both public-sector and private markets have given great attention to attempting to identify and control risk exposures. ; The author of this article observes that one of the more interesting developments in this evolution has been the push, for several reasons, toward real-time gross settlement systems with collateralization. Systems, instruments, and markets are evolving at a fast pace that is putting pressure on the political entities to bring their various rules and regulations into harmony, and such harmonizing requires extensive international coordination and cooperation. In addition, central banks realize that they still may be thrust into the role of the lender of last resort should the difficulties threaten to bring down settlement and clearing systems.