GLOBAL financial DEVELOPMENT REPORT 2013
payment systems survived the crisis relatively unaffected, in large part because of efforts by central banks to introduce robust payment systems (such as real-time gross settlement systems that reduce counterparty risk) well before the onset of the crisis. Second, once the crisis spread, many central banks acted decisively to step up liquidity provision to stabilize large-value payment systems and the markets that rely on this infrastructure, such as the interbank money market. Without support from central banks, the failure of one or more participants to settle their exposures in these markets could have created credit or liquidity problems for other participants and posed a systemic risk to the financial system. The timely provision of liquidity by and large mitigated these concerns about counterparty risk. The global financial crisis did, nonetheless, reveal some limitations in existing payment and securities settlement systems. For instance, stress emerged in securities settlement systems, in particular for over-thecounter (OTC) derivatives markets. In this area, the crisis highlighted limitations in the transparency and legal framework governing securities settlement systems.6 Building a stronger infrastructure for securities and derivatives settlement systems to minimize counterparty risk is an important concern for many emerging markets, where the development of robust securities settlement systems has sometimes lagged behind the rapid development of equity and derivatives markets. The remainder of this section reviews the role that state agencies and central banks have played in supporting payment and settlement systems through the financial crisis. It also highlights some of the challenges to the development and operation of payment and securities settlement systems that have become apparent during the crisis. The chapter argues for an active role of the state in the development, regulation, and oversight of payment and securities settlement systems, particularly in (a) mitigating counterparty risk through interventions in interbank markets and (b) mitigating counterparty and settlement risks in securities transactions
Th e R o l e o f t h e S t a t e i n F i n a n c i a l I n f r a s t r u c t u r e  
through the development of a sound legal and regulatory framework.
Payment and securities settlement systems Payment and securities settlement systems are the infrastructure that enables the transfer of monetary value between parties discharging mutual obligations (World Bank 2011b). This infrastructure consists of several components, which include the legal, regulatory, and oversight frameworks for payment transactions, large-value funds transfer systems, retail payment systems, foreign exchange settlement systems, and securities settlement systems. Payment systems are a key part of a country’s financial infrastructure. They can, however, also be a major transmission channel of shocks during times of financial crisis: large-value payment systems are particularly important for systemic stability because they have the potential to generate and transmit disruptions between the financial and the real sector of an economy. Since the current report focuses on financial stability and the role of the state, this chapter focuses on large-value payment systems and the steps that central banks have taken to strengthen these systems. The chapter also touches on securities settlement systems. In particular, it reviews the performance of OTC derivatives settlement systems, which is one of the areas in which the crisis highlighted the need for proactive oversight and development support. Robust payment and security settlement systems promote economic activity by controlling the counterparty risk inherent in the transfer of high-value funds and by helping with the implementation of monetary policy. Payment systems are essential for financial sector development because they contribute to the innovation and development of new financial products and facilitate functioning of financial markets (Listfield and MontesNegret 1994). The smooth functioning of payment systems can mitigate financial crises by reducing or eliminating counterparty risk related to financial market transactions and is therefore vital for ensuring financial stability
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