Financial regulators are warning that potential risks to the interconnected global payment and settlement infrastructure are not taken into account in current disaster recovery and crisis management procedures.
A new report by the BIS-led Committee on Payment and Settlement Systems (CPSS) says globalisation and other long-term developments have made the network of domestic and cross-border systems underpinning financial markets increasingly connected. As a result, the smooth functioning of an individual system often depends on the functioning of other related systems.
Although these interdependencies have strengthened the global infrastructure by reducing several sources of settlement costs and risks, this development has also increased the potential for disruptions to spread quickly and widely across multiple systems, warns the CPSS.
The report raises concerns these risks are not adequately reflected in stress-tests, risk controls, contingency funding plans and crisis management procedures. The CPSS recommends that central banks and other authorities review policies in light of the increasingly integrated nature of the global financial infrastructure.
The report lays out a framework for analysing the risks of interdependencies, along with specific recommendations for the industry, including business continuity testing practices that include interdependent parties on a domestic and cross-border basis.
"Systems underpinning global financial markets are becoming more interconnected in increasingly complex ways", says Timothy Geithner, president of the Federal Reserve Bank of New York and CPSS chairman. "Recent market conditions emphasise how important it is that the settlement infrastructure supporting financial markets is robust and reliable, even in adverse circumstances."
The CPSS says it will review and - where necessary - adapt, its internationally recognised standards for the management of payment and settlement risks, especially operational and liquidity risks, to reflect the challenges created by interdependencies.
You can read the CPSS report here:» Download the document now 643 kb (PDF File)