A payment system consists of a set of instruments, procedures and rules for the transfer of funds among system participants and is based on an agreement among the participants in the system and the system operator. Funds in the system are transferred according to an agreed upon technical infrastructure. All payment systems in a country are of significance, but there are those that are of systemic importance either because of the size of the transactions within a system, and/or the nature of transactions within a system, and/or because of the exclusivity of a system. Generally, systems that handle high-value transactions are systemically important. However, that is not to say that systems that involve lower-value transactions cannot be of systemic significance. The type (nature) of transactions handled by the system is also significant in determining whether the system is systemically important. For example, an interbank payment system or a securities settlement system is typically considered to be systemically important since such systems handle financial markets' transactions. The Committee on Payment and Settlement Systems (CPSS) defines a system as systemically important if disruption within it could trigger or transmit further disruptions among participants or systemic disruptions in the financial area more widely. The CPSS, however, admits that the distinction between systems that are systemically important and those that are not is not clear cut. It is left to the discretion of individual central banks to identify and classify systemically important payment systems relevant to their respective economies.

There are several types of interbank payment systems operating, such as the Real Time Gross Settlement (RTGS) system, the Designated-time (Differed) Net Settlement (DNS) system, and other hybrid systems. Similarly, there are regional payment systems, such as the Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET) that link national payment systems for a particular region -- in the case of TARGET, countries in the Euro area. Since November 2007, TARGET2 has been operational, which unlike its predecessor is a single, centralized system within the Euro area that provides participating countries with a common technical platform and a harmonized level of service.

The Committee on Payment and Settlement Systems and Its Core Principles for Systemically Important Payment Systems

Over the last several decades the international community has been actively promoting the importance of sound payment systems. To this end, in 1990, the central bank governors of Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States, collectively called the G10 nations, established the Committee on Payment and Settlement Systems (CPSS). The CPSS in turn established a Task Force on Payment Systems Principles and Practices in May 1998 to consider what principles should govern the design and operation of payment systems in all countries. The Task Force comprised representatives of the G10 nations and European Central Banks, representatives from eleven other national central banks of countries at different stages of economic development, and representatives from the IMF and the World Bank.

In January 2001, the CPSS published the Core Principles for Systemically Important Payment Systems (CPSIPS), which according to the CPSS are expressed deliberately in a general way to help ensure that they are durable and useful in all countries. The CPSIPS do not represent a blueprint for the design or operation of any individual system but rather form a template (recommendations) of key characteristics that all systemically important payments systems should satisfy. Unlike certain other international financial standards such as the Basel Core Principles for Effective Banking Supervision, the CPSS does not provide a methodology for assessors. The CPSS in compiling the CPSIPS expected it to be a benchmark -- both for countries with well developed payment systems and those with underdeveloped payment systems. The CPSIPS acts as a benchmark for countries with well developed payment systems against which to assess their payment systems. For countries with underdeveloped payment systems, the CPSIPS acts as a valuable tool in developing and implementing modern and functioning payment systems. 

The CPSIPS are comprised of 10 Principles and 4 Central Bank Responsibilities.  The 10 Principles address various issues of the payment systems such as: (1) the legal framework; (2) the understanding and management of financial risk; (3) the settlement of payments; and (4) the security, efficiency and governance of the system etc. The Central Bank Responsibilities on the other hand deal with the specific responsibilities of central banks in supervising systemically important payment systems and ensuring that these systems comply with the CPSIPS.  

Applicability of the Committee on Payment and Settlement Systems' Core Principles for Systemically Important Payment Systems (CPSIPS)

The CPSIPS acts as a benchmark for assessors to identify the strengths and weaknesses of a country's systemically important payment systems (SIPS) and thereby enable policymakers and stakeholders make appropriate additions and improvements to these systems. Additionally, the CPSIPS also measure SIPS potential to transmit shocks and helps identify the general risks associated with these systems to the economy's monetary system and/or financial market.

The main assessments on countries' compliance with CPSIPS are undertaken by the IMF/World Bank Financial Sector Assessment Program. The Bank for International Settlements (BIS) publishes country reports usually referred to as Red, Blue, Green or Yellow Books, depending on the country's geographic region.  Specific regional bodies, such as, the European Union and the Western Hemisphere Payments and Securities Settlement Forum (for Latin America) publish self-assessments for payment systems operating in countries within their respective regions.  Most often central banks publish annual reports, financial stability assessments and the occasional self-assessments on the payment systems they operate and/or manage. These reports from the central banks often prove valuable to distinguish those payment systems that are of systemic importance. 

Standard Setting Body

Committee on Payment and Settlement Systems (Bank for International Settlements)

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Core Principles for Systemically Important Payment Systems (January 2001)

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Further Reading

Dziobek, Claudia, J. Kim Hobbs, and David Marston, “Toward a Framework for

Systemic Liquidity Policy,” IMF Working Paper 00/34, Washington, D.C.: IMF, 2000.

European Central Bank, “A Single Currency – An Integrated Market Infrastructure,” September 2007.

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European Central Bank, “Blue Book: Payment and Securities Settlement Systems in the European Union,” Vol. I, Frankfurt, Germany: ECB, August 2007.

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Galos, Peter and Kimmo Soramäki, “Systemic Risk in Alternative Payment Designs,” Working Paper Series No. 508, Frankfurt, Germany: ECB, July 2005.  

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International Monetary Fund, “Experiences with the Assessment of Systemically Important Payment Systems,” SM/02/129, Washington, D.C.: IMF, 2002.

Sarr, Addourahmane, and Tonny Lybek, “Measuring Liquidity in Financial Markets,” IMF Working Paper 02/32, Washington, D.C.: IMF, 2002.

European Central Bank, “From TARGET to TARGET2 — Innovation and Transformation,” September 2006.

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