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Energy and Financial Crisis
Enron is about export energy and the failure to maintain standards on the macroeconomy. Enron's bonds were not bonds representing energy and pure water but bonds based on their market dealings and shifting assets reported in audits. PIA Banks and Chronotechnics Holding deal only in bonds which represent quantities of energy and pure water and other real and tangible assets like pharmaceuticals and plastics. The concept of the bank reflects the thinking of the Basel Capital Reform. What Enron provided with its failure are two market opportunities:
1) In the banking market, the defaulting bonds needed an arbitrage negotiations and also replacement with better performing bonds in the banks' portfolios.
2) In the energy and pure water markets, the defaulting bonds created the largest open market share in this market in history. At this point real suppliers can renegotiate the contracts with the largely governmental consumers.
As a result, we can describe the potential market by describung the exposures which must be covered in the two sectors:
Banking:
JP Morgan US$900m
Citigroup US$800m
Credit Lyonnais US$250m
Bank of Tokyo-Misubishi US$248m
Chubb Corp US$220m
Canadian Imperial Bank US$215m
SumitomoMitsui Banking Corp US$210m
Nikko Cordial US$207m
Principal Financial Group US$207m
Abbey National US$164m
National Australia Bank US$104m
Duke Energy Corp US$100m
William Cos US$100m
ING US$95m
Commonwealth Bank of Australia US$78m
Bank of Australia US$78m
Bear Stearns US$69m
Sanwa Bank US$44m
Mitsubishi Trust & Banking US$39m
RWE AG US$8m
Sony Bank US$3m
Unconfirmed exposure
Royal Bank of Scotland US$855m
Aegon US$300m
Barclay's Bank US$428m
ABN AMRO US$99m
ANZ US$69m
Energy Sector Exposures
Dynegy US$75m
Mirant US$60m
BP US$20m
Westpac US$51m
American Electric US$50m
El Paso US$50m
Aquila US$50m
Centrica US$43m
ONEOK US$43m
TotalFinaElf US$25m
Dominon Resources US$11m
PPL US$10m
Exelon US$10m
Northern Border Partners US$9m
Pacific Gas and Electric National Energy Group US$8m
All of these bonds and market shares are open for negotiation. The most aggressive export policy is reported in the UK Partners Power projects.
Trade Partners UK: Infrastructure-Power
International Monetary and Balance of Payments Crisis
The emerging bond market is the reflection of issues like the implementation of Intraday Liquidity by Central Banks. There are many systems like TARGET which are emerging with globalization and require new types of securities, and certificates in cross-border trading to guarantee the validity of the transfers. Our Luxemburg legal counsel at PIA Bank S.A. is an expert experienced in these transfers and equalization payments between central banks.
Chapter 3: Operational Practice in Domestic RTGS Systems
3.1 The Harmonisation Issue
53. The introduction of a single currency within the area of the Monetary Union will completely transform the relationships which exist between EU central banks, because central banks of the Member States which adopt the single currency will, for the first time, be offering services in the same currency (although in a transitional phase these may be in different denominations of this currency). According to the "market principle" (see Section 1.2.1 above), banks will have some discretion in the way they organise their payment flows, and hence may enter TARGET from different domestic RTGS systems. On the other hand, according to the "decentralisation principle", domestic RTGS systems will have to be allowed to retain specific features. The need to reconcile these two principles poses the problem of whether, and to what extent, terms offered to credit institutions (as ESCB customers) by domestic RTGS systems and hence by TARGET should be harmonised in Stage III7. Indeed, in Stage III domestic RTGS systems will be at the same time local systems and part of a unified system (TARGET) that may be expected to become, over time, as "uniform" as a domestic system.
54. The EMI considers that the harmonisation of domestic RTGS systems should not be sought as an end in itself. Rather, it should be limited to the minimum required to avoid:
impediments to the efficient conduct of the single monetary policy;
distorting competition between banks.
55. The EMI has identified three areas in which the features of domestic RTGS are likely to require a certain level of harmonisation. Such areas are:
the provision of intraday liquidity (see Section 3.2 below);
operating hours (see Section 3.3 below);
pricing policies (see Section 3.4 below).
Other relevant features, such as access criteria to TARGET (see Section 3.5 below) or the conditions under which queuing facilities are managed (see Section 3.6 below) may not require harmonisation.
56. Any harmonisation which is required in the three areas identified above will have to be achieved by the time TARGET starts, in Stage III, not before. To this end, a number of requirements have to be reconciled. First, the diverse features of domestic RTGS which are not inconsistent with Stage II should not be prematurely suppressed. Such diversity will permit, inter alia, further examination of the advantages and disadvantages of the different solutions among which the "best" solutions for TARGET will be chosen. Secondly, account must be taken of the lead time needed by central banks and commercial banks to put in place the technical infrastructure required by TARGET and the need to avoid excessive costs of conversion. Thirdly. consistency between payment arrangements and monetary policy operations, particularly in the field of liquidity provision, will have to be ensured. Lastly, it needs to be recognised that decisions in some national RTGS systems may limit the availability of some options at the start of Stage III, and perhaps for some time thereafter.
3.2 The Provision of Intraday Liquidity
3.2.1 Liquidity Needs
57. Banks' liquidity needs arise from their payment system activities. If, over a given period of time, they send payment orders whose value exceeds the value of the payment orders they receive, they incur a liquidity shortfall which can be met either out of their pre-constituted holdings at the settlement agent, or by obtaining credit from the settlement agent or from other participants in the payment system.
58. For a given flow of payments, the amount of central bank money needed differs depending on whether payments are processed through net settlement systems or through real-time gross settlement systems. The former relies on intra-day provision of liquidity by the other participants, while the latter needs explicit intraday liquidity provided by the settlement agent (i.e. the ESCB in the case of TARGET). It is clear that, with RTGS systems, adequate provision of central bank money is necessary, not only at the end of the day but also during the day.
59. An RTGS system may function, in principle, without any required reserves or any overdraft facility but most central banks are reluctant to introduce a system on such lines. While it would give banks a very strong incentive to schedule their payment flows in a way which allows for a more efficient use of their resources in central bank money, it might give rise to a risk of gridlock, and also would increase excessively the cost to the banking communities of the move to RTGS systems.
60. The ESCB may itself schedule its own payments (customer payments, rollover of maturing overnight (or longer) liquidity support) during the day, so that it minimises the liquidity needs for the banks. If central banks' payments are organised efficiently throughout the day the need for the ESCB to provide extra liquidity could be reduced.
61. The rest of this section focuses on the provision of intraday liquidity, in the form of central bank money. Such provision will be a crucial feature for the system since inadequate liquidity mechanisms may lead to "gridlock" which: i) may have systemic implications; and ii) would discourage EU banks from processing payments through TARGET. The need for a harmonised policy with regard to the provision of intra-day liquidity will also be discussed.
3.2.2 Instruments to Provide Intraday Liquidity
62. Reserve requirements The Treaty on European Union leaves open to the ESCB the choice of whether to use or not to use reserve requirements. Required reserves are primarily a monetary policy instrument which cannot be imposed for purely payment system reasons. However, if, for monetary policy reasons, the ECB decides that required reserves should be imposed on banks' accounts, it would be useful, from a payment system point of view, that they could be used to provide intraday liquidity to the TARGET participants instead of being blocked as term deposits.
63. A market for intraday liquidity Whenever intraday liquidity is scarce and provided at a cost, there is an incentive for banks to economise on it. This will produce an increase in the velocity of circulation of central bank money, thereby increasing the cost in its various forms (intraday interest charges, collateral, etc.). This is likely to stimulate, at some stage, the emergence of a market for intraday funds.
64. Overdrafts at the central bank A more common way to increase the possibilities for the banks to get intraday liquidity is to allow them to overdraw their accounts at the central bank. Since unsecured overdrafts entail credit risks for central banks, they need to be fully collateralised, even during the day. This principle will apply for TARGET according to the statute of the ESCB8 9.
65. In order to provide equal access to central bank credit throughout the EMU area, it will be necessary to harmonise the definition of assets which can be accepted by the NCBs as collateral10, and the conditions under which their value will be taken into account. Such a study will be conducted by the EMI as an element of the preparatory work for Stage III.
66. The EMI and EU central banks will also examine whether securities settlements systems which currently exist in EU countries will be able to support payment systems and monetary policy needs.
3.2.3 The Need for a Harmonised Policy
67. Each of the ways in which credit institutions get the intraday liquidity they need entails specific costs (or opportunity costs) for the banks, ranging from zero, when unlimited uncollateralised overdrafts are granted, to high costs, when a high level of non-remunerated reserves is needed. The overall liquidity costs are determined by the actual mix of ways to provide liquidity in a specific country. In the context of Stage III, it is difficult to envisage a situation in which these costs would vary considerably from one country to another.
3.2.4. The Distribution of Liquidity within the System
68. At any moment a participant in the system may experience liquidity constraints at one NCB while it has liquidity available at another. At least initially, EU central banks do not intend to propose to the TARGET participants the possibility of consolidating their accounts (see Section 2.4.4 above) at the various central banks during the day because such a service would complicate the design of the Interlinking system and would be in conflict with the very tight time constraints under which they have to implement the TARGET system.
69. For the same reason, EU central banks do not intend to provide the possibility of transferring collateral from one country to another during the day. This would not only entail technical problems, but also involve legal issues which would be complex to solve. Instead, participants in the system will have the possibility of obtaining liquidity against collateral in any NCBs, provided that they have pledged collateral with it. However, they will not have to pledge collateral with all NCBs with which they have an account since they will be allowed to make payments between their accounts within the TARGET system in order to allocate liquidity wherever they need it.
3.3 Operating Hours
70. Whenever central banks stop processing payments on behalf of their customer banks. liquidity which remains on the banks' accounts can no longer be used. In practice, therefore, the daily closing time for RTGS systems is also the last time when loans can be contracted on the local money market for same-day value.
71. The smooth functioning of the money market in Stage III will require that the Interlinking and all the RTGS systems which are part of TARGET are open during a large part of the day. As a result, some early closing RTGS systems may have to extend their opening hours in Stage III. However, it is not yet certain that all RTGS systems need to close when the Interlinking closes. Further analysis will be undertaken on this issue before a definitive conclusion is reached.
3.4 Pricing Policies
72. In Stage III, the ESCB's pricing policy should satisfy three requirements, namely of avoiding:
any unfair competition with the private sector (according to the "market principle");
the subsidising of payments or certain kinds of payments (in order to achieve economic efficiency);
undue competition within TARGET.
73. At the moment, the costs of central banks' payment services are not comparable from one country to another. Further work will be undertaken, within the framework of preparatory work in view of Stage III on a common methodology for cost calculation which enables due account to be taken of the structural differences between NCBs, including such factors as the size of their branch network. At a later stage, the need for harmonisation of pricing policies will be considered.
3.5 Access Conditions
74. The issue of access conditions in TARGET can be divided into two aspects: access to the Interlinking and access to the RTGS systems.
3.5.1 Access to the RTGS Systems
75. Under the minimum approach, the EMI feels that there is no need to define common access criteria to the RTGS systems which will be connected to TARGET. Access criteria could continue to rely on national approaches, provided that they comply with the general framework adopted by EU central banks in the report on "Minimum Common Features for Domestic Payment Systems".
3.5.2 Use of the Interlinking
76. Under the minimum approach, it is proposed that all participants in an RTGS system which is connected to TARGET should be allowed to send (and receive) payments through the Interlinking system. Such a solution would avoid the need for a complex mechanism for each system to be able to recognise whether the bank of the beneficiary is a participant in the receiving RTGS or not.
77. As a result, i) a participant in any RTGS system connected to TARGET will be entitled to send payments via TARGET, and ii) any participant in any RTGS system will be obliged to accept any payment for its benefit or for the benefit of its customers which is processed through TARGET (see also Section 2.4.3 above). The terms and conditions of most RTGS systems may have to be modified accordingly before TARGET starts operating.
3.6 Queuing Facilities
78. As explained in Section 3.2.2, it is very likely that most, if not all, RTGS systems within TARGET will provide for some form of access to central bank liquidity during the day. However, because the provision of intraday liquidity will be limited, at least by collateral requirements, payments which exceed the available liquidity, granted by the central bank to a given participant need to be rejected or put in a waiting queue. The second solution offers more flexibility to the banks in general and therefore reduces the need for intraday liquidity. Furthermore, the way in which queues are managed also results in a greater or lesser need for central bank money. For example, waiting queues which function under a simple "first in, first out" principle require banks to hold more liquidity than queues which provide for some form of simultaneous settlement of some queued items. As a result, these mechanisms create for RTGS systems participants liquidity needs, and therefore costs, which can differ from one country to another. However, it can be expected that RTGS systems which offer costly mechanisms to control and manage flows of payments will be induced to voluntarily modify their functioning rules, so that the impact of these differences on competition will be very limited. Therefore, also in accordance with the minimum approach principle, no harmonisation will be sought in this field in the implementation phase of the TARGET system.
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7. In addition, they may also create problems for the definition of the dimensions of the Interlinking system.
8. Article 18 states that "the ECB and the national central banks may conduct credit operations with credit institutions and other market participants. with lending being based on adequate collateral".
9. Some central banks prefer to use repurchase agreements instead of pledges of collateral to provide intraday liquidity to their banking sector, mainly because they are better protected in their country in case of default by the borrower.
10. For example, some central banks only accept public sector securities as collateral, while other central banks accept private claims.
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Did you know...?
Since Singapore estimates that by 2006 the cost of handling cash in their economy will be S$1 billion, Singapore is moving forward with a comprehensive effort that is meant to replace, by 2008, its notes and coins in favour of a digital money system.
Source: The Future of Money , (OECD, April 2002), ISBN: 92-64-19672-2
The Basel Capital Report dealing with International Redulations about Capital
Accountancy, International Contract Law and Management Crisis
PIA Bank has extensive experience with contract law and international property rights. Our Luxemburg legal counsel was instrumental in acquiring magnetic train technology for the Shanghai railway and also in patenting cutting edge technology. Dr. di Virgilio has had experience with judgments involving UNIDROIT and the registering of secret technology in the EU.
China Has a High-Grade Legal System for Intellectual Property Protection
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