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Central Bank and Multilateral Agency Publication | August 01, 1997

Mexican Payment System Reforms

Case Studies of International Payment Systems

Chakra Advisors LLC provided guidance on improvements to payment system policy and strategy in many countries.

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Mexican Payment System Reforms

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International Payments Policy and Regulation
By: Sujit "Bob" Chakravorti
Source: Federal Reserve Bank of Dallas Financial Industry Studies

Since the late 1980s, Mexico has engaged in a series of far-reaching financial and economic reforms. These reforms include the privatization of its banks and other state-owned enterprises, interest rate deregulation, an easing of reserve requirements, reductions in restrictions on trade and foreign bank entry, and an overhaul of the payments systems. This article investigates the ongoing payments system reforms that Mexico began in 1994.

The safe and efficient transfer of monetary value in exchange for goods, services, and financial assets is vital to any market economy. The apparatus used to transfer monetary value is the payments system. For the purpose of analysis, the payments system as a whole can be divided into large-value and small-value systems. Large-value, or wholesale, payments systems are primarily used to transfer funds between banks, and the average value of each transfer is relatively large. Folkerts-Landau, Garber, and Lane (1994) list the important functions of large-value systems: to provide the necessary infrastructure for the intermediation of household and business payments, to enable more efficient liquidity management by banks, to assist the development of security markets, and to allow for more effective implementation of monetary policy. The primary thrust of payments system reform in Mexico thus far has concentrated on large-value systems.

Small-value, or retail, payments systems process relatively small payments among consumers and businesses. Retail payment instruments include cash, checks, automated clearinghouse payments, credit and debit cards,and, more recently, electronic money. Pingitzer and Summers (1994) state that “the efficient operation of a market economy depends on the availability of a smoothly functioning small-value transfer system that connects all economic agents.”

Although financial analysts agree that large-value payments systems should be safe and efficient, there is little consensus on their optimal design and operation. Major differences exist in the types of large-value payments systems employed in developed countries. As a result, developing countries seeking to enhance their integration with international capital markets face difficulty in identifying the most appropriate blueprint for strengthening their own large-value systems. Mexico provides an interesting example of the recent push to enhance the safety and efficiency of large-value payments systems in emerging financial markets.

In early 1994, the Bank of Mexico, the central bank of Mexico, proposed reforming its payments system. The goals of these reforms are to decrease the amount of unsecured intraday credit it extends to banks over the large-value interbank payments system, to promote market discipline in the determination of credit exposures related to the payments system, and to move large-value transactions away from checks to electronic systems. The first two goals are designed to reduce payments system risk, while the last one is aimed at increasing efficiency.

Progress has been made on each of these fronts. Except under certain circumstances, the Bank of Mexico no longer extends uncollateralized intraday credit to settle payments on its large-value payments system. Instead, to maintain adequate liquidity while imposing market discipline, the Bank of Mexico implemented a net large-value payments system, in which participants send payments based on intraday lines of credit they extend to one another. In addition, the Bank of Mexico has successfully promoted this system as an alternative to high-value checks. However, some challenges remain for the Bank of Mexico in implementing the desired market discipline in the intraday credit market.

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Academic Journal | February 15, 2000

Analysis of Systemic Risk in Multilateral Net Settlement Systems

Chakravorti studies systemic risk in multilateral net settlement systems is investigated using a four-period model. The model focuses on the tradeoff between systemic risk and the cost of interbank transfers along with the importance of the overnight money markets that were a key factor in the most recent financial crisis. Banks optimize their reserve holdings at the central bank, the settlement medium, based on a future random liquidity shock and payment system parameters such as total asset and collateral requirements, and net debt caps. The model’s results are as follows. The model determines the maximum number of bank defaults that can be sustained without a stoppage in the clearance and settlement process. An interbank funds market increases the efficiency of the payment system. The payment system operator can reduce systemic risk by imposing asset and collateral requirements, and debit caps. The central bank can provide sufficient liquidity to prevent a systemic collapse but may face high costs.

Central Bank and Multilateral Agency Publication | September 01, 1998

Managing Cross-Border Settlement Risk: The Case of Mexican ADRs

The Mexican securities clearance and settlement system is ahead of many markets in terms of having one of the shortest settlement periods. However, cross-border transactions—such as those involving American Depositary Receipts—have tended to be associated with a greater number of settlement fails than purely domestic transactions because the U.S. and other foreign markets have longer settlement periods. Chakravorti investigates reforms to the Mexican securities clearance and settlement system that are aimed at improving liquidity and efficiency while maintaining safety and reducing both general and cross-border settlement fails. These reforms include penalties for late settlement and the establishment of an electronic lending facility. In addition, a proposed clearinghouse would bilaterally net securities transactions that involve the same type of security.

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