Capitalism thrives on competition. But eventually somebody wins the game, ending competition. This is why governments are needed-to play referee, keeping everybody honest by making sure everybody gets a chance to play.
But this is not always so. Consider the markets for settlement of large payments-that is, presently, foreign exchange. There's plenty to be said for having a central mechanism for settling the $600 trillion in annual currency exchanges. As things stand, the risk of a house-of-cards cascade of transaction defaults, called Herstadtt Risk, is more dangerous to global business than the risk of business concentration implicit in the formation of the Continuous Linked Settlements Bank (CLS), a centralized clearing house now being formed.
Which is all fine, says H. Robert Heller, evp of San Raphael, CA- based Fair, Isaac and Co. and a former governor of the Federal Reserve-to a point. "I applaud the CLS; I think what they're doing is great. It's an important step forward," he says. But, he asks, "Will it solve all the problems (inherent in Herstadtt Risk)? It will solve all the problems we can think up now; but there are others we haven't thought about, and someday they will come around, too."
Heller's solution? A sort of global Fedwire that can serve as a backup settlement system in emergencies. "Just like a lender of last resort, there should be a settlement system of last resort," he explains. "Is it possible to do that? It's just like the CLS; if you'd asked someone two years ago whether it was possible, they'd have said it could never be pulled off. But they're doing that. So of course it's possible to do it."
Such a mechanism is necessary, he says, because in a time of real crisis, there would be a system available with the unquestioned support of the lead international organizations in that field. "What you really need (in that situation is) the unquestioned finality of the settlement on the books of the institutions. If it's a private (system), that's fine; a private one will probably do better (overall). But the one thing it doesn't have is the unquestioned source of funds because a government is standing behind it."
Heller's nominee for the job? The International Monetary Fund. He floated the idea several years ago, he says, but while "a couple of people thought it was interesting, I wasn't pushing it, and nobody else was, and the IMF had other fish to fry." It didn't take off, but that doesn't mean the idea isn't a good one.
A backup alternative to the CLS would be especially important because Heller expects eventually that this nascent institution will settle all global financial flows.
The fact that the CLS is intended today to settle foreign exchange payments, he says, doesn't mean that other securities won't move over to it. "Let's say you want to buy some stock in Deutsche Bank, and it's traded in Frankfurt, or you buy Sumitomo Bank stock, and it's traded in Japan- if you use the CLS, you eliminate the same sort of problems (the CLS eliminates in foreign exchange deals), so why not?"
This likelihood doesn't mean, though, that the CLS should be allowed to become the only global settlements system. "You could say that, ideally, there should be more than one (settlements system if only so) there wouldn't be a monopoly, because any monopoly will get fat and happy," he says. "You need somebody in the wings that can take over, or you need the active competition right there. That's why CHIPs is still there, and so on."
-reinbach tfn.com
