Released on September 7 by the Committee on Payments and Market Infrastructures (CPMI), the Report aims to provide practical guidance to central banks in the establishment of liquidity bridges with the caveat that each central bank remains responsible for determining whether such bridges would benefit their payment system participants.
To help central banks make this assessment, the Report outlines some of the benefits and challenges in establishing liquidity bridges and proposes a framework for implementing them.
A liquidity bridge is considered as ‘a cross-currency intraday liquidity arrangement between two or more central banks’.
Key highlights of the Report are summarised hereunder:
Reduce the need to have multiple cash or collateral buffers in multiple currencies/jurisdictions, and/or to undertake FX transactions
Reduce funding and transaction costs, operational complexity, and associated FX, credit and settlement risks
Increase flexibility in banks’ intraday liquidity management
[Ultimately] reduced funding costs for cross-border payments
Risks and challenges
Financial losses for central banks may arise in certain events (e.g. the borrowing large-value payment system (LVPS) participant fails to repay the intraday credit provided by the lending central bank)
Costs of establishment and operation that will depend on the precise operational design and the degree of operational integration between participating central banks
Operational and systemic risks as liquidity bridge arrangements increase the operational interdependencies between participating central banks. An operational failure at one central bank may affect the orderly functioning of the real-time gross settlement (RTGS) system operated by the other
Intersection with local liquidity regulatory requirements
Specific challenges for emerging markets and developing economies (e.g. currency volatility, scarcity of suitable collateral, conflict of law, lack of experience and technical capabilities, political and reputational risks…).
Use of liquidity bridges to be restricted to certain kinds of routine payment activity such as large timed payments related to participation in market infrastructures
Consideration of the number of central banks involved, the direction of liquidity and collateral flows, and the role of the facilitating and lending central banks
Eligibility criteria for participants
Pricing and remuneration
Operating hours, duration of liquidity availability and collateral encumbrance
The Report also discusses factors that may facilitate or hinder the effectiveness of such bridges.