Central Banking

RBNZ vows to aid transition to new retail payments system

Reserve Bank of New Zealand to reduce cost of overnight borrowing for three months as banks shift to new settlement before interchange system
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The Reserve Bank of New Zealand (RBNZ) has pledged to temporarily reduce the premium it charges banks to access overnight funds from the central bank, to ease the transition to a new retail payments system.

In a statement released on Wednesday, the central bank said the cost of overnight borrowing will be lowered from 50 basis points to 25bp over the official cash rate between January 30 and April 30 next year.

At present, retail interbank payments are settled as bilateral net payments at the end of each day. However, by the first quarter of 2012, Payments New Zealand, a banking industry-owned payments body, plans to introduce a new interbank retail payment system known as Settlement Before Interchange (SBI) that will enable retail payments to be made in a number of payment windows during the day.

The RBNZ warned the change from end-of-day net settlement to payments during the day might affect the way liquidity moves around the payment system and between banks.

Sonia Speedy, a spokesperson at the RBNZ, says halving the margin on overnight borrowings will reduce the cost of any temporary increases in demand for cash as the new payments system is implemented. "It is unlikely banks will need to hold more liquid assets per se, but there might be a reallocation of cash around the banking system."

While the lower overnight borrowing rate will help banks adapt to the new liquidity dynamics, it will not have any implications on monetary policy.

The RBNZ is tasked with overseeing the payment system in New Zealand and promoting the maintenance of a sound and efficient financial system. It has also engaged with the industry on retail payment system policy issues as an observer on the New Zealand Bankers' Association (NZBA) Payment Systems Committee.

As part of the NZBA Failure to Settle project, the industry proposed a move towards SIB to reduce settlement risk in the retail payment system. A paper published by RBNZ in December 2008 identified significant settlement risks from the net bilateral payments system in New Zealand. The analysis shows that routing high-value transactions through the retail system significantly increases end-of-day interbank exposures.

SBI seeks to mitigate this interbank settlement risk by settling such payments before banks incur obligations based on the expectation of interbank payments being made. Under this approach, a number of batches of net bilateral obligations would be processed each day through the Exchange Settlement Account System, New Zealand's large-value payment system.

In 2010, Payments New Zealand was established to take over the governance of New Zealand's bank-to-bank payment clearing and settlement system from the NZBA. The governance change aimed to permit non-bank institutions to participate in the payments system.

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