Role of the NBRM in the Payment System in the Republic of Macedonia

Oversight of the Payment Systems

 Payment systems are one of the most vital components of the financial and economic infrastructure. Their efficient functioning enables safe and timely finalization of the financial transactions, thus giving a major contribution to the performances of the national economy. On the other hand, the payment operations may expose the participants to a significant risk, representing a channel for transmitting tremors from one to another part of the financial, i.e. the economic system. This so-called systemic risk is the main cause for the larger interest of the National Bank of the Republic of Macedonia in the payment systems oversight.

This role of the National Bank of the Republic of Macedonia is in line with the basic principles of the systematically important payment systems and it is directed towards of elimination and minimization of the possible risks that resulted from the functioning of the payment systems.  

In accordance with the legal authorizations, NBRM monitors the payment system in the country.  

The intensity of the payment systems oversight by the Central Bank is in proportion with its estimation of the systemic risk or the system-wide risk, which originates from the system.  Since its primary focus is the systemic risk, the oversight the Central Bank conducts is focused on the systems which are processing large value payments individually or cumulatively and/or where the participants are making or can cause significant, unwanted mutual exposure when conducting payment activities. This also refers to the systems where the problems can cause broader systemic consequences, although the included amounts do not enlarge the main systemic risk.

Those are the reasons why the principles of risk evaluation, their categorization and analysis are of great importance for implementing the oversight role of the Central Bank.

Principles used when estimating safe and efficient payment system in the oversight process are reviewed and codified in the report issued by the Bank for International Settlements (Basic principles for the systemically important payment systems). National Bank of the Republic of Macedonia, accepted these principles as a guide for own oversight activities. They helped the National Bank of the Republic of Macedonia to lower the level of all kinds of risk in the payment system.

The payment operations risks have different forms and usually, they are categorized as:

1.       Liquidity risk:A risk when the participant is not able to settle the whole liability in the due period, but for a certain time in future.

2.       Credit risk: A risk when the participant is not able to settle its total liability, neither in the due period, nor later.

3.       Operational risk: A risk which occurs due to the hardware or software problems, human omissions, malicious actions, which result in a system failure or bad performance, i.e. financial exposure and possible losses.

4.       Legal risk : A risk which occurs in case of improperly interpretation of the legal framework which can subject the payment systems or the participants to a large financial exposure and possible losses.

The oversight of the payment systems pays attention to of all different risk elements on analytical basis. They should be identified and where possible, quantified and conceivable for the payment systems operators, participants and the public. The oversight, regarding the design or the system structure, includes determining the operational legal framework in which the system operates, as well as its rules, operational procedures and operational environment, estimating the suggestions for amending the rules or operative procedures, monitoring the changes in the nature of processed payments, and the changes in managing the procedures with the systems and the participants. 

The National Bank of the Republic of Macedonia prescribes the criteria, manuals, decisions and may suggest changes in the rules, design or the functionality of the system or its environment, in order to eliminate, reduce or to enable better risk management. The main objective is to achieve prompt final settlement due to the minimization of the duration of the financial exposure between the members, especially when large amounts are in question. This was a motive to introduce the RTGS system for the large and urgent payments, known as MIPS - Macedonian Interbank Payment System in the National Bank of the Republic of Macedonia. Before the changes were made, the settlement was done on net basis with the banks exchanging payment notes during the day, but the settlement of the accumulated amounts was carried out on multilateral net basis only at the end of the day. Before the changes were introduced, there were no mechanisms through which the exposure that the members were causing one to another could have been monitored. The RTGS system allows the payments among the MIPS member banks to be carried out in real time and on the accounts with NBRM, so the banks receive confirmation for the received payments on their behalf only if final settlement is carried out, with witch the main objective to minimize the risks is fulfilled.

Another main objective of the National Bank of the Republic of Macedonia is to reach simultaneous exchange of amounts in the system used for the settlement of the financial market transactions, especially in cases when the included amounts are large. The payment systems used for settlement of the foreign exchange transactions and the total sale of the securities are an example of this. The aim is to secure that one party accepts a certain amount only if the other party has done that as well. This operation is known as “payment vs. payment” on the foreign exchange market, while on the stock exchange market as “ delivery vs. payment”. Hence, the exposure of the participants to a risk on the foreign exchange market and the stock exchange market is reduced to a minimum.

When the oversight is practically implemented, the fact that the changes in the model of the payment circulation through different payment systems must be inevitably reflected in the changes in the environment in which the system operates, is also taken into consideration. For example, the increasing dependence of the whole financial sector, including the payment system, from the information technology and telecommunication networks, increases the exposure to hardware and software failure. As a result of this, the oversight is also focused on this source of operational risk.

The National Bank of the Republic of Macedonia does not monitor the operational aspects of the payment systems on daily basis, nor it monitors the solving of the operational problems to be solved on daily basis, except in cases when the National Bank of the Republic of Macedonia itself is operationally involved. In addition, the Central Bank is not responsible for the relations between the banks and other payment service providers and their clients. The main responsibility for confidential functioning of the payment system lies in the system-operators of the participants in the system. The Central Bank’s objective is to stress that the operators should undertake reasonable steps in order to provide powerful systems.

In regard to the reduction of the operational risk, the National Bank of the Republic of Macedonia insists on the technical safety, however not neglecting the back-up opportunities for support and the possible plans for undertaking security measures and internal controls. The oversight of the Central Bank is aimed at securing that the system operators recognize these objectives and that they refer to them. The oversight is also aimed at identifying the usual relations for example, the usual affiliation of a certain technology, which may cause a critical point of failure of several systems.

The systemic risk may also be a result of legal vagueness, a lack of clearness, etc. In such situations, the oversight of the payment systems also includes the cooperation with the Government and other interested authorities, in order to identify the vague points, and where possible, to make adequate changes and amendments to the regulations governing this area. 

In accordance with that, it can be concluded that the oversight of the payment systems by the National Bank of the Republic of Macedonia is part of its broader responsibilities for the monetary and the financial stability. The focus of the Central Bank’s oversight activity is on the identification of the potential risks, which occur in designing and operations of the payment systems, and undertaking measures for their elimination and control.