Bank offers credit facility to avert a domino collapse

THE BANK of England has offered to take on a new and central role in the money clearing system because of growing fears about the risks of a domino collapse if a large bank fails, or is unable, to meet its obligations.

The Bank's offer includes a credit facility for clearing banks, designed to help them operate a proposed new system for settling large payments immediately instead of with a delay of hours.

Robin Leigh-Pemberton, Governor of the Bank, said at a conference on payment systems that a failure by one bank to settle its debts in the clearing system could 'bring about a major crisis with unpredictable effects, not just domestically but internationally'.

Mr Leigh-Pemberton disclosed a plan drawn up by Britain's clearing banks to radically alter Chaps, the Clearing House Automated Payments System, to remove the risk that the failure of one bank to pay will damage other banks.

The banks have decided in principle that Chaps will be converted into a real-time system by 1995 so that large payments will be cleared instantly, through accounts at the Bank of England.

At the moment, the clearing takes place through the Bank of England once a day, and commercial banks build up huge exposures to other banks in the hours beforehand.

Welcoming the plan, Mr Leigh-Pemberton said the Bank of England was willing to make available a special credit facility to the banks to provide the extra liquidity they would need to operate the new system.

Systems for making large payments were fundamental to implementing monetary policy and to the operation of financial markets as well as the economy as a whole. A failure of one bank to pay would put irresistible pressure on central banks to use public funds for a bail-out to prevent a 'full systemic crisis'. He said it was important to find other ways to deal with the problem that would not put public money at risk.

Mr Leigh-Pemberton said real-time gross settlement was the best way forward for all significant financial centres.