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Bank of England warns on payment system risks

30 November 2000  |  3472 views  |  0 london

The Bank of England has warned the Government of potential risks to the financial system from uncontrolled competition in payments, and of the dangers arising from technological dependencies.

The Bank issued the warning in a paper decribing its work on the oversight of payment systems. It follows a report by Don Cruickshank which identified bank control of money transmission services as a potential disincentive to new entrants. The Government has warned the banking industry that it will introduce legislation to stimulate competition in the payments industry.

The BofE states in its paper: "Risks in payment systems need to be identified, measured, monitored and controlled. The public policy interest in reducing risk may be greater than the sum of individual interests of members. Even if members are keen to reduce risks in a system, they may be unable to make the necessary changes because of difficulties in co-ordinating action among themselves."

The Bank also outlines its concerns that the increasing dependence of the whole financial sector, including payment systems, on IT and telecommunications networks gives rise to an increased exposure to hardware and software failure.

It says the work on Y2K has encouraged a wider debate among market infrastructure operators about the different kinds of operational risks and the adequacy of back-up and disaster recovery plans.

"Reducing operational risks means addressing technical reliability and redundancy, back-up facilities and contingency plans, security measures and internal controls," the Bank states.

The Bank also points to common dependencies on a particular technology or supplier which might constitute a single point of failure for several different systems. It cites bank dependence on the Swift messaging network as a particularly potent example.

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