Payment Systems
Concurrently with the introduction of the euro in the 11 euro area member states in January 1999 the joint European payment system in euro, TARGET, and several other euro payment systems were also introduced. In Denmark DEBES, the Danish part of TARGET, was introduced without problems.
Payment Systems in Euro
Euro payment systems
The introduction of the euro created a need for the fast and secure transfer of large-value payments in euro within the euro area. In 1995 it was therefore decided to establish a joint euro-denominated payment system called TARGET [1]. TARGET's two main objectives are to facilitate the conduct of monetary-policy transactions in the euro area and generally to provide for faster, safer and cheaper cross-border payments in euro.
EU member states which do not participate in EMU are also connected to TARGET. TARGET's Danish interface DEBES [2] has thus been developed by Danmarks Nationalbank in cooperation with the Danish financial sector, cf. Box 3.
Box 3 The Structure og Target
TARGET is a decentralised system whereby the participants hold accounts with their national central banks. The system connects the national real-time gross settlement systems via an interlinking module. Domestic payments are thereby processed in the national systems, while cross-border payments are processed in the respective national systems and exchanged bilaterally between the central banks.
A Danish bank wishing to send a payment in euro to another Danish bank should use DEBES. The money is transferred from the sender's euro-denominated account to the recipient's euro-denominated account with the Nationalbank.
A Danish bank wishing to send a payment in euro to a participant in another country will first submit the payment via DEBES. The Nationalbank transfers the amount from the Danish bank's account with the Nationalbank to the account of the recipient country's central bank with the Nationalbank. At the recipient country's central bank the amount is transferred from the Nationalbank's account to the account of the recipient bank. The central banks thus act as correspondent banks to each other.
TARGET/DEBES is described in further detail in the Monetary Review, 2nd Quarter, 1998, p. 15ff.
TARGET operated smoothly in the first year despite minor problems with operational stability in individual countries. The central banks are working continuously to develop the system and improve its stability.
Use of TARGET increased steadily during 1999 [3]. In December the number of euro payments processed in TARGET had increased to 4.1 million from 3.0 million payments in January, cf. Chart 34. In December the total value of the payments was euro 20,994 billion. Cross-border payments accounted for approximately 27 per cent in terms of number of payments but approximately 40 per cent in value terms. In 1999 the number of dispatched payments totalled 42.3 million, for a value of euro 239,472 billion.
In addition to TARGET a number of parallel euro payment systems have been developed with limited groups of participants [4]. These are used primarily for euro payments of lower value, including payments for business customers. These euro payment systems were also introduced without problems and in December processed payments totalling euro 8,391 billion, corresponding to a market share of approximately one third of payments in euro. The largest alternative systems are the private pan-European Euro 1 and the German EAF system whose turnover in December totalled respectively euro 3,512 billion and euro 2,917 billion.
Chart 34 Payments in Euro in Various Payment Systems in 1999
The establishment of several alternative payment systems to the traditional network of correspondent banks requires the banks to consider which system they wish to use for transmission and receipt of payments. During the year the European Banking Association (EBA) and several other banking organisations prepared guidelines and recommendations regarding choice of payment system.
In addition to the normal closing days in 1999 (weekends, Christmas Day and New Year's Day) TARGET was closed extraordinarily on 31 December to ensure a smooth transition to the year 2000. In view of the low turnover on days which are national holidays in many countries it has been decided that TARGET will be closed on Good Friday, Easter Monday, 1 May and Boxing Day in 2000.
Cross-border collateral
The EU central banks provide credit only against full collateral. In order to facilitate the provision of collateral in TARGET the EU central banks have developed the correspondent central banking model, CCBM. Via CCBM a bank in the EU can obtain credit from its central bank by pledging collateral as securities held in a safekeeping account with the central bank of another EU member state.
Danish banks' branches in the euro area can obtain credit in euro against collateral as Danish government and mortgage-credit bonds, provided that the central bank in question accepts Danish securities as collateral. This is the case for the central banks of Germany, France, the Netherlands, Luxembourg and Finland. The central banks in the euro area jointly guarantee the value of their securities, if the collateral is to be realised. If the value of the securities is insufficient to cover the credit for which the securities were pledged as collateral the central banks in the euro area are jointly liable for the loss. Different rules apply to member states which have not adopted the euro, and the Nationalbank alone guarantees the value of the Danish securities.
Use of CCBM in Denmark is limited. As of end-December 1999 the Nationalbank provided collateral for euro 284 million. In general the EU member states which have not adopted the euro have made little use of the cross-border provision of collateral due to the limited use of TARGET in these countries. The extensive use in the UK is attributable mainly to the fact that the Bank of England also provides credit facilities in pound sterling via CCBM. Particularly in Belgium, Germany, Luxembourg and Italy use of CCBM has been considerable, cf. Table 4.
Table 4 Cross-Border Collateral Provided via CCBM, December 1999
| Euro million | Credit-extending central bank |
Country of issue |
| Austria | 2,783 | 3,098 |
| Belgium | 7,704 | 28,029 |
| Germany | 40,910 | 25,538 |
| Denmark | 0 | 284 |
| Spain | 4,469 | 7,265 |
| ECB1 | 2,821 | - |
| Finland | 1,057 | 1,193 |
| France | 29,379 | 3,884 |
| UK | 19,115 | 1,216 |
| Greece | 0 | 0 |
| Ireland | 5,384 | 0 |
| Italy | 1,543 | 73,608 |
| Luxembourg | 22,502 | 10,704 |
| Netherlands | 24,950 | 4,879 |
| Portugal | 42 | 1,845 |
| Sweden | 0 | 1,117 |
| Source: | ECB. |
| 1 | The ECB is not a credit-extending central bank. The figure covers the investment of ECB's own portfolio. |
In CCBM, which is based on the existing national infrastructure, the central banks perform a role which it would have been more natural for a private system to handle since the central banks provide a service which the securities centres themselves can provide. In the longer term it is likely that cross-border provision of collateral will involve a different system, cf. Box 4.
Box 4 Internationalisation of Securities Settlement
CCBM is the main channel for cross-border provision of collateral within the EU. However, certain securities centres establish links to each other to enable cross-border transfer of securities. Today the Danish Securities Centre is linked to the international securities centre, Euroclear, and the Swedish securities centre VPC.
The link model is possibly becoming outdated in view of the considerable consolidation in the European securities market in these years. Euroclear plans to give international participants access to the entire European registration system via a link to Euroclear. The plan is for Euroclear to be the hub of the European securities settlement system with spokes in the form of links to the national securities centres.
CEDEL, another international securities centre, is based in Luxembourg and will merge with Deutsche Börse Clearing, a securities centre in Germany. Finally, Euroclear and Sicovam (the French securities centre) are concluding a strategic alliance.
In addition, the securities centres in Denmark, Norway and Sweden have for some time discussed plans for a joint Nordic securities centre, S4 (Scandinavian Securities Settlement System).
Euro-Denominated Payment Systems in Denmark
Denmark is connected to TARGET via DEBES. From the beginning of 1999 the Danish Securities Centre, VP, offered settlement of securities in euro, and in May 1999 it was possible to settle retail payments in euro in Denmark [5].
The EU member states outside the euro area participate in TARGET on more restrictive terms than the euro area member states, cf. the 1998 Annual Report, p. 76. The euro area participants have access to unlimited intraday liquidity, whereas the Nationalbank may only make liquidity available to the Danish participants in TARGET on the basis of a deposit by the Nationalbank with a central bank in the euro area. The Danish participants pay for the share of the deposit to which they require access. The current price is 0.07 percentage points per annum. The deposit was originally euro 1 billion, but demand for intraday liquidity was around euro 500-600 million. As from 1 January 2000 the deposit has been reduced equivalently.
DEBES has functioned satisfactorily in its first year. The Nationalbank is constantly developing DEBES to ensure operational stability and to accommodate new requirements of the system.
After a slow start use of DEBES increased steadily. In December 1999 4,465 cross-border payments for a value of euro 101 billion were transmitted against 2,240 payments for a value of euro 79 billion in January 1999. Domestic payments also saw an increase from 181 payments for a value of euro 0.7 billion in January 1999 to 539 payments for a value of euro 1.2 billion in December 1999. The level reflects Denmark's non-participation in the euro. Turnover in DEBES is thus still very limited compared to turnover in the Nationalbank's system for payments in kroner, the DN Inquiry and Transfer System. Turnover in the euro retail clearing system is also very modest.
Kronos
The Nationalbank's krone payment system, the DN Inquiry and Transfer System, dates from 1981 and in certain respects is outdated. For example, screen images are not updated on a realtime basis and the banks have to enter data manually from the DN Inquiry and Transfer System to their own liquidity management systems. The Nationalbank is therefore developing a system called KRONOS, to replace the payment part of the DN Inquiry and Transfer System [6]. This system is more advanced and also more user-friendly for the banks. The system will include such features as a modern interactive graphic user interface for e.g. ongoing updating of screen images. Moreover, it will be possible to submit payments via SWIFT [7] to KRONOS, and KRONOS may be more easily integrated with other systems at the banks. Finally, KRONOS will meet the requirements for inclusion of currencies in the future international currency settlement system, CLS [8]. The aim of the Nationalbank is for the Danish krone to be included as a settlement currency in CLS.
KRONOS is expected to be completed at the beginning of 2001 and will replace DEBES during 2001, thereby giving the banks one single system for krone-denominated and euro-denominated payments.
Footnotes
[1] Trans-european Automated Real-time Gross settlement Express Transfer system.
[2] Danmarks Euro BEtalingsSystem.
[3] Cf. Jesper Berg and Thomas Christensen: "TARGET's First Year", Danmarks Nationalbank, Monetary Review, 1st Quarter, 2000.
[4] For example, only two Danish banks are among the approximately 70 direct participants in Euro 1. For comparison, DEBES has 35 direct participants and TARGET has more than 5,000.
[5] These systems are described in further detail in the 1998 Annual Report, p. 77.
[6] The DN Inquiry and Transfer System comprises a number of other functions besides the payment part, such as trading in certificates of deposit, etc.
[7] SWIFT is the main international network for financial transactions. For example DEBES is based on SWIFT.
[8] CLS is described in further detail in the 1998 Annual Report, page 79.
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Version 1.0 April 2000 Nationalbanken.
Published by Danmarks Nationalbank April 2000, http://www.nationalbanken.dk