BofE to force more second-tier banks to take up Chaps membership

BofE to force more second-tier banks to take up Chaps membership

The Bank of England is urging second-tier banks to take up direct membership of the Chaps high value payment system in an effort to bolster financial stability, warning that it may take action if its requests are spurned.

In a speech delivered at a business meeting in Leeds, Chris Salmon, executive director of banking services and chief cashier, says that Chaps needs to expand its membership to counter a sharp rise in intraday credit risk.

Indirect membership of Chaps is the norm in the UK, where correspondent relationships with Chaps member banks are used to submit and receive payments on behalf of customers.

"Chaps currently has 18 members that serve the entire sterling banking industry," says Salmon. "Over 50% of Chaps payments are made by correspondent banks on behalf of customer banks. The risks that some banks are running to provide intraday liquidity are very large: the Bank estimates that some intraday credit lines are in excess of 10% of the correspondent bank's core tier 1 capital."

He says that the Bank will be engaging with the correspondent and customer banks to encourage greater direct membership of payment systems. "More formal actions will be taken if necessary," he adds.

The move to expand membership comes as the Bank champions a number of technical reforms of the system, including the implementation of a Liquidity Savings Mechanism, designed to mitigate against the risk of delayed payments, and work with settlement system operator Crest on modifications intended to reduce demand for intraday liquidity for securities settlement.

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