The Commission has today taken steps to ensure that borrowing under the temporary recovery instrument NextGenerationEU will be financed on the most advantageous terms for EU Member States and their citizens. The Commission will use a diversified funding strategy to raise up to around €800 billion in current prices until 2026. This approach, which will be in line with the best practices of sovereign issuers, will enable the Commission to raise the needed volumes in a smooth and efficient way. This will also attract investors to Europe and strengthen the international role of the euro.
Johannes Hahn, Commissioner in charge of Budget and Administration, said: “NextGenerationEU is a game changer for European capital markets. Today, we are unveiling the engine that will pump the fuel to power NextGenerationEU. The funding strategy will operationalise the NextGenerationEU borrowing, so we will have all necessary tools in place to kick-start the social and economic recovery and promote our green, digital and resilient growth. The message is clear: as soon as the Commission has been legally enabled to borrow, we are ready to get going!”
Borrowing to finance the recovery
NextGenerationEU – at the heart of the EU’s response to the coronavirus pandemic – will be funded by borrowing on the capital markets. We will raise up to around €800 billion between now and end-2026.
This will translate into borrowing volumes of on average roughly €150 billion per year, which will make the EU one of the largest issuers in euro. All borrowing will be repaid by 2058.
While the Commission has been borrowing before – to support EU Member States and third countries – the volumes, frequency and complexity of the NextGenerationEU borrowing have called for a fundamental change in the approach to capital markets.
A diversified funding strategy will respond to these new funding needs. It will enable the Commission to mobilise all funds when required on the most advantageous terms for the EU Member States and their citizens.
Diversified funding strategy: a snapshot
A diversified funding strategy combines the use of different funding instruments and funding techniques with an open and transparent communication to the market participants.
The Commission’s diversified funding strategy would combine:

Annual decision on borrowing volumes and 6-monthly communication on the funding plan’s key parameters, to offer transparency and predictability to investors and other stakeholders;
Structured and transparent relationships with banks supporting the issuance programme (via a Primary Dealer Network);
Multiple funding instruments (medium and long-term bonds, some of which will be issued as NextGenerationEU green bonds, and EU-Bills) to maintain flexibility in terms of market access and to manage liquidity needs and the maturity profile;
A combination of auctions and syndications, to ensure cost efficient access to the necessary funding on advantageous terms.

The borrowing operations will be embedded in a robust governance framework, which will ensure coherent and consistent execution.
In its work, the Commission will continue to coordinate with other issuers, including the EU Member States and supranationals.
The added value of a diversified funding strategy
The diversified funding strategy will help the Commission to achieve two main objectives: address the large funding needs of NextGenerationEU and obtain the desired low cost and low execution risk in the interest of all Member States and their citizens:

By using a wide range of maturities and instruments and by making funding operations more predictable, the Commission will ensure a larger market absorption capacity. The ability to auction debt will make the funding operations even more efficient. This will help address the large funding needs.
By allowing flexibility to decide when to execute funding operations and which funding techniques or instruments to use, the Commission will obtain the desired low cost and low execution risk in the interest of all Member States.

Next steps
Following today’s package, the Commission will proceed with a series of steps to operationalise the diversified funding strategy. Among them:

Setting up a Primary Dealer Network. In line with practices of comparable issuers, the Commission will set up a Primary Dealer Network to facilitate the efficient execution of auctions and syndicated transactions, support liquidity in the secondary markets, and ensure the placement of our debt with the widest possible investor base. The application form and the General Terms and Conditions for participation will be published shortly.

Publish the first annual Borrowing Decision (and accompanying Financing Decision) and first NextGenerationEU funding plan. To ensure transparent communication with the markets, the Commission will adopt its first annual borrowing decision and communicate the information related to its first funding plan before the start of the NextGenerationEU borrowing, expected this summer (timing being dependent on the approval of the Own Resources Decision by all Member States which will empower the Commission to borrow for NextGenerationEU). The borrowing operations can then start as soon as the Own Resources Decision will enter into force. Funding plans will then be updated semi-annually.

Background
NextGenerationEU
NextGenerationEU is at the heart of the EU response to the coronavirus crisis and aims to support the economic recovery and build a greener, more digital and more resilient future. The EU agreed this instrument as part of an over €2 trillion (in current prices) or €1.8 trillion (in 2018 prices) stimulus package, which also comprises the 2021-2027 long-term budget.
The centrepiece of NextGenerationEU is the Recovery and Resilience Facility – an instrument to offer grants and loans to support reforms and investments in the EU Member States with a total value of €723.8 billion in current prices.
In addition, NextGenerationEU will reinforce several EU programmes. To finance NextGenerationEU, the EU will borrow on the capital markets. Repayment will take place over a long-time horizon, until 2058. This will avoid immediate pressure on Member States’ national finances and enable EU Member States to focus their efforts on the recovery.
To help repay the borrowing, the EU will look into introducing new own resources (or sources of revenue) to the EU budget, on top of the already existing ones.
The EU as a borrower
The European Commission, on behalf of the EU, is a well-established participant in the capital markets. Over a period of 40 years, the European Commission has run several lending programmes to support EU Member States and third countries.
Last year, the Commission also started borrowing for SURE – the up to €100 billion instrument – to help protect jobs and keep people in employment. So far, 3/4ths of the EU SURE funds have been raised in six very successful issuances, which has made it possible to finance loans to Member States on very advantageous terms.
All of these lending operations were financed on a back-to-back basis, mainly through syndicated bond issuances.
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The COVID-19 pandemic has brought social and economic disruption worldwide, but is also providing governments with the opportunity to put economies on a more sustainable and inclusive growth path while addressing the underlying challenges, according to the OECD’s Going for Growth policy report.
Going for Growth 2021: Shaping a Vibrant Recovery analyses pre-existing weaknesses as well as those brought on by the pandemic, and offers policy makers country-specific advice to seize the opportunity for a fundamental reset.
OECD Secretary-General Angel Gurría and Italian Minister of Economy and Finance Daniele Franco launched the report shortly after the second meeting of G20 finance ministers and central bank governors under the Italian Presidency on 7 April. Its recommendations provide a basis for G20 discussions on strategies to push forward a vibrant economic recovery and promote higher-quality growth.
“The pandemic is a painful reminder that the nature of our past growth was often unsustainable and left many people behind,” Mr Gurría said. “The recovery is an opportunity to set our policies right, to achieve growth that is stronger, equitable, sustainable and more resilient. And for this to happen, governments have to act now.”
Going for Growth 2021: Shaping a Vibrant Recovery provides a framework for policy reform covering three key dimensions:

Building resilience and sustainability: Structural policies can improve the first line of defence to shocks (health care and social safety nets, critical infrastructure), improve public governance, and strengthen firms’ incentives to better take longer-term sustainability considerations into account.

Facilitating reallocation and boosting productivity growth. Steering growth in a more durable, resilient and inclusive direction requires structural policy action to increase job dynamism and support firms becoming more dynamic, more innovative and greener.

Supporting people through transitions. Policies should ensure that people are not left behind in transitions, so that reallocation is socially productive and builds resilience. This requires investments in skills, training and a big push for accessing quality jobs – particularly amongst vulnerable groups – as well as broad-based social safety nets, and better learning and support to access jobs.

Going for Growth policy advice includes short country notes for OECD members and a number of Partner countries (Argentina, Brazil, China, India, Indonesia and South Africa).
The report also highlights the crucial importance of countries acting together – in particular in the case of challenges that span borders. Going for Growth identifies a number of areas where international co-operation is needed to enhance the effectiveness of domestic policies and underpin the shift to more sustainable, resilient and equitable globalisation: healthcare, climate change, international trade and the taxation of multinational enterprises.
Key recommendations and individual country notes on OECD and key non-member countries are accessible at: https://www.oecd.org/economy/going-for-growth/. You are invited to include this link in media coverage of the report.
Contact:

Lawrence Speer | Lawrence.Speer[at]oecd.org

The OECD Media Office | news.contact[at]oecd.org

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The factors to consider on COVID-19 support measures, and a roadmap to address climate-related financial risks.
This letter from the FSB Chair, Randal K. Quarles, to G20 Finance Ministers and Central Bank Governors ahead of their virtual meeting on 7 April notes that, while progress is moving at different speeds across jurisdictions, the vaccine rollout heralds an inflection point in the COVID-19 pandemic. While it is sensible to keep measures that support financial system stability and financing of the real economy in place as long as needed, the factors to be considered in deciding whether to extend, amend and, eventually, end support measures are taking shape.
The FSB report on these factors notes that withdrawal of support measures before the macroeconomic outlook has stabilised could be associated with significant immediate risks to financial stability. But financial stability risks may gradually build if support measures remain in place for too long. On balance, most authorities currently believe that the costs of premature withdrawal of support could be more significant than maintaining support for too long. Overall, a flexible, state-contingent approach can help to minimise financial stability risks. FSB members have committed to coordinate on the unwinding of support measures and the FSB will continue to support that coordination.
The Chair’s letter applauds the significant progress made on too-big-to-fail (TBTF) reforms for banks. The evaluation of TBTF reforms for banks – the largest evaluation that the FSB has carried out so far – suggests that reforms have reduced systemic risks, enhanced the credibility of resolution and market discipline, and ultimately produced net benefits to society. Nevertheless, TBTF reforms can be developed further, notably on implementation of Total Loss Absorbing Capacity (TLAC) and transparency of resolution funding mechanisms.
Moreover, some risks have moved outside the banking system. The FSB’s Holistic Review of the March 2020 market turmoil examined the increasingly important role of – and vulnerabilities in – non-bank financial intermediation (NBFI). The FSB’s NBFI work programme seeks to address these vulnerabilities. A first deliverable will be to submit policy proposals to enhance money market fund resilience to the G20 in July.
Finally, the letter notes the importance of addressing issues related to climate change. Three climate-related workstreams are currently underway in the FSB, covering data, disclosures and regulatory and supervisory practices. In July, the FSB will provide the G20 with two reports, on ways to promote consistent, high-quality climate disclosures in line with the recommendations of the Task Force for Climate-related Financial Disclosures; and on the data necessary for the assessment of financial stability risks and related data gaps.
While the greater momentum in climate work by various bodies is welcome, it also increases the importance of strategic vision, good coordination, and clear communication to the G20 and the public. The FSB will present to the G20 a coordinated, forward-looking roadmap to address climate-related financial risk. This roadmap will be key to promoting rapid progress amongst jurisdictions. To enable better coordination, the FSB has invited the Network for Greening the Financial System (NGFS) to participate in FSB climate-related work, and the FSB will apply for observer status in the NGFS. The FSB will also coordinate closely with the G20 group on sustainable finance re-established by the Italian G20 Presidency as it develops its broader roadmap on sustainable finance, so that the FSB’s work dovetails with theirs.
READ FULL SPEECH HERE
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Foreign aid from official donors rose to an all-time high of USD 161.2 billion in 2020, up 3.5% in real terms from 2019, boosted by additional spending mobilised to help developing countries grappling with the COVID-19 crisis, according to preliminary data collected by the OECD.
Within total Official Development Assistance (ODA) provided by members of the OECD’s Development Assistance Committee in 2020, initial estimates indicate that DAC countries spent USD 12 billion on COVID-19 related activities. Some of this was new spending and some was redirected from existing development programmes, according to an OECD survey carried out in April and May 2020. Most providers said they would not discontinue programmes already in place.
Total ODA equated to around 1% of the amount countries have mobilised over the past year in economic stimulus measures to help their own societies recover from the COVID crisis. Meanwhile the global vaccine distribution facility COVAX remains severely underfunded, OECD Secretary-General Angel Gurría said during a virtual presentation of the aid data.
“Governments globally have provided 16 trillion dollars’ worth of COVID stimulus measures yet we have only mobilised 1% of this amount to help developing countries cope with a crisis that is unprecedented in our lifetimes,” Mr Gurría said. “This crisis is a major test for multilateralism and for the very concept of foreign aid. We need to make a much greater effort to help developing countries with vaccine distribution, with hospital services and to support the world’s most vulnerable people’s incomes and livelihoods tobuild a truly global recovery.”

Foreign aid rose in a year that saw all other major flows of income for developing countries – trade, foreign direct investment and remittances – decline due to the pandemic, and domestic resources under increased pressure. Total external private finance to developing countries fell 13% in 2020 and trade volumes declined by 8.5%. (See the OECD’s Global Outlook on Financing for Sustainable Development 2021.)
The rise in 2020 ODA was also affected, however, by an increase in loans by some donors. Of gross bilateral ODA, 22% was in the form of loans and equity investments, up from around 17% in previous years, with the rest provided as grants.
The 2020 ODA total is equivalent to 0.32% of DAC donors’ combined gross national income, up from 0.30% in 2019 but below a target of 0.7% ODA to GNI. Part of the rise in the ratio was due to the fact that GNI fell in most DAC countries. Six DAC members – Denmark, Germany, Luxembourg, Norway, Sweden and the United Kingdom – met or exceeded the 0.7% target. Among non-DAC donors, whose assistance to developing countries is not included in the ODA total, Turkey provided aid equivalent to 1.12% of its GNI.
ODA rose in 16 DAC countries, with some substantially increasing their aid budgets to help developing countries respond to the pandemic. The largest increases were in Canada, Finland, France, Germany, Hungary, Iceland, Norway, the Slovak Republic, Sweden and Switzerland. ODA fell in 13 countries, most notably in Australia, Greece, Italy, Korea, Luxembourg, Portugal and the United Kingdom. G7 donors provided 76% of total ODA and DAC-EU countries 45%. ODA provided by EU Institutions jumped by 25.4% in real terms as they mobilised funds for COVID-19 related activities and increased sovereign lending by 136% over 2019.
Short-term support to help with the COVID-19 crisis focused on health systems, humanitarian aid and food security, according to the OECD survey. Aid providers indicated they would focus in the medium-term on making diagnostics and vaccines available to countries in need, as well as offering support to address the economic and social repercussions of the pandemic.
“At the outset of the pandemic, DAC donors said that they would strive to protect ODA volumes. I am grateful and proud to say that they have done that and more. Donor countries have stepped up to support developing countries struggling with the health and economic fallout of COVID-19, even as their own economies and societies have been battered,” said DAC Chair Susanna Moorehead. “The next few years will be tough and the finance we provide must work harder than ever. If we really are going to build forward better and greener, we must focus on the most vulnerable countries and the most vulnerable people in them, especially women and girls.”
Bilateral ODA to Africa and least-developed countries rose by 4.1% and 1.8% respectively. Humanitarian aid rose by 6%. Excluding aid spent on hosting refugees within donor countries – which was down 9.5% from 2019 to USD 9.0 billion and mainly concerned Canada, Iceland and the Netherlands – ODA rose by 4.4% in real terms in 2020.
ODA makes up over two thirds of external finance for least-developed countries. The OECD also monitors flows from some non-DAC providers and private foundations. Preliminary data released by the OECD each April is followed by final statistics published at the end of each year with a detailed geographic and sectoral breakdown. (See the 2019 ODA breakdown.)
Net ODA has risen for the most part steadily in volume terms from just below USD 40 billion (in 2019 prices) in 1960. It has more than doubled in real terms (up 110%) since 2000, when the Millennium Development Goals were agreed, despite the impact of the 2008 crisis on provider economies.
Contact:

Catherine Bremer, OECD Media Office | catherine.bremer[at]oecd.org (+33 1 4524 80 97.)

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Securities financing transactions (SFTs) such as securities lending and repurchase agreements (repos) play a crucial role in supporting price discovery and secondary market liquidity for a wide variety of securities. However, such transactions can also be used to take on leverage and can lead to maturity and liquidity mismatched exposures. They therefore can pose risks to financial stability.
The FSB published policy recommendations to address financial stability risks in SFTs in August 2013. In November 2015, the FSB developed standards and processes for collecting and aggregating global data on SFTs (SFT Data Standards). To facilitate national implementation of the SFT Data Standards, the FSB has developed reporting guidelines.
Drawing on practical experience, the FSB is providing these Frequently Asked Questions (FAQs) to promote a common approach and to further help national implementation of the SFT Data Standards. The FAQs will continue to be updated as market practices evolve.
FULL PUBLICATION HERE
Contact:

FSB Secretariat | fsb[at]fsb.org

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The turmoil seen in March 2020 highlighted key vulnerabilities in the money market fund (MMF) sector. This article assesses the effectiveness of the EU’s regulatory framework from a financial stability perspective and identifies three important lessons. First, investment in non-public debt assets exposes MMFs to liquidity risk, highlighting the need to limit investment in illiquid assets. Second, low-volatility net asset value (LVNAV) funds are particularly vulnerable to liquidity shocks, given that they invest in non-public debt assets while offering a stable net asset value (NAV). Enhanced portfolio requirements could strengthen their liquidity profile. And third, MMFs seem reluctant to draw down on their liquidity buffers during periods of stress, suggesting a need to make buffers more usable.
Continue Reading below.
1. Introduction
2. Vulnerabilities in funds investing in non-public debt
3. Liquidity risk in the LVNAV framework
4. MMFs’ use of liquidity buffers
5. Conclusion
Box 1 Investors’ role in the outflows experienced by euro area MMFs in the March 2020 turmoil
References
Authors:

Laura-Dona Capotă
Michael Grill
Luis Molestina Vivar
Niklas Schmitz
Christian Weistroffer

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The European Commission has today proposed to exempt from Value Added Tax (VAT) goods and services made available by the European Commission, EU bodies and agencies to Member States and citizens during times of crisis. This responds to the experience gained  during the course of the Coronavirus pandemic. Among other things, it has shown that the VAT charged on some transactions ends up being a cost factor in procurement operations that strains limited budgets. Therefore, today’s initiative will maximise the efficiency of EU funds used in the public interest to respond to crises, such as natural disasters and public health emergencies. It will also strengthen EU-level disaster and crisis management bodies, such as those falling under the EU’s Health Union and the EU Civil Protection Mechanism.
Once in place, the new measures will allow the Commission and other EU agencies and bodies to import and purchase goods and services VAT-free when those purchases are being distributed during an emergency response in the EU. The recipients might be Member States or third parties, such as national authorities or institutions (for example, a hospital, a national health or disaster response authority). Goods and services covered under the proposed exemption include, for instance:

diagnostic tests and testing materials, and laboratory equipment;
personal protective equipment (PPE) like gloves, respirators, masks, gowns, disinfection products and equipment;
tents, camp beds, clothing and food;
search and rescue equipment, sandbags, life jackets and inflatable boats;
antimicrobials and antibiotics, chemical threat antidotes, treatments for radiation injury, antitoxins, iodine tablets;
blood products or antibodies;
radiation measuring devices;
development, production and procurement of necessary products, research and innovation activities, strategic stockpiling of products; pharmaceutical licences, quarantine facilities, clinical trials, disinfection of premises, etc.

Commissioner for the Economy, Paolo Gentiloni said: “The COVID-19 pandemic has taught us that these kinds of crises are multifaceted  and have a wide-ranging impact on our societies. A rapid and efficient response is essential, and we need to provide the best response now in order to prepare for the future. Today’s proposal supports the EU’s goal to react to crises and emergencies in the EU. It will also ensure that the financial impact of EU-level relief efforts to fight the pandemic and support the recovery is maximised.”
Next steps
The legislative proposal, which will amend the VAT directive, will now be submitted to the European Parliament for its opinion, and to the Council for adoption.
Member States shall adopt and publish, by 30 April 2021 the laws regulations and administrative provisions necessary to comply with this Directive. They shall apply those measures from 1 January 2021.
Background
The Coronavirus pandemic has thrown into sharp light the importance of coherent, decisive and centralised EU-level preparation and response in times of crisis. In the context of the Coronavirus pandemic, the von der Leyen Commission has already outlined plans to strengthen EU preparedness and management for cross-border health threats, and presented the building blocks of a stronger European Health Union. At the same time, the Commission has proposed to strengthen cooperation between EU Member States through the EU Civil Protection Mechanism with the aim of improving responses to future natural or man-made disasters. For instance, in the context of the new European Health Union, the Commission announced the creation of the Health Emergency Response Authority (HERA) to deploy rapidly the most advanced medical and other measures in the event of a health emergency, by covering the whole value chain from conception to distribution and use.
The EU has already taken action in the field of taxation and customs to support the fight against and the recovery from the Coronavirus pandemic. In April 2020, the EU agreed to waive customs and VAT charges for imports of masks and other protective equipment needed to fight the pandemic. This waiver remains in place and plans are underway for its extension. In December 2020, EU Member States agreed on new measures proposed by the Commission to allow a temporary VAT exemption for vaccines and testing kits being sold to hospitals, doctors and individuals, as well as closely related services. Under the amended Directive, Member States can apply either reduced or zero rates to both vaccines and testing kits if they so choose.
Compliments of the European Commission.
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France Payments Forum – Les Rencontres Digitales Conference 2021 – Crypto-payments, 8 April 2021; Opening address by Denis Beau, First Deputy Governor |
Introduction
The health crisis that we have all been living through for a year now has affected people’s day-to-day habits, changing not only how we consume but also how we like to pay. This has sped up the transition towards more digital approaches.
This acceleration raises major challenges for Europe’s payment ecosystem, but also for payment regulators and supervisors. Thinking now specifically from the viewpoint of the latter, the central question to be addressed is as follows: how to facilitate and support the transition whilst at the same time maintaining the foundations that underpin a safe and efficient payment system. From a safety perspective, these foundations are built on an appropriate regulatory framework and on the availability under any circumstance of central bank money, which alone has legal tender status and which anchors the stability of the whole system; efficiency, meanwhile, relies on having diverse and competing payment solutions and participants, to ensure inclusivity and competitiveness.
I would like to share with you my perspective on the answers to this question. I will begin by highlighting the challenges raised by the accelerated digital transition of our payment system, seen from the perspective of an authority tasked with safeguarding monetary and financial stability (1), before going on to discuss how we at the Banque de France are playing our part in tackling these challenges (2).
I/ Challenges
Major innovation in the field of payments has clearly accompanied the increasing digitalisation of the ways in which we consume and behave, fuelling the emergence of a dynamic and enhanced new ecosystem. As I see it, this raises three types of challenges for the safety and efficiency of our payment system.
A.    Ensure that the rise of “decentralised finance” contributes positively to the safety and efficiency of our payment system
When I say decentralised finance, I am talking about the new trend towards the tokenisation of financial assets, such as the creation of new tradable assets associated with new rights, for instance utility tokens, and the development of crypto-assets. These offer opportunities to improve our payment systems and solutions, particularly for cross-border payments, but also for securities issuance and settlement systems. They could also help to expand the array of financing tools available to businesses. But they also pose risks that could undermine the efficiency and safety of these systems. These risks must be mitigated and controlled. First-generation crypto-assets were born of a desire to create a disintermediated means of payment that would not have an issuer and that would circulate on decentralised settlement infrastructures beyond the control of banks and governments. As a result of this, their actual footprint remains marginal, however much media attention they may receive. Furthermore, as intermediaries in exchanges, these assets are far less efficient than our existing currencies, for a variety of reasons, including their volatile prices, transaction costs and transaction times, which make it hard to use these assets as a means of payment, plus the risks to which users and service providers are exposed. Stablecoins seek to remedy the shortcomings of first-generation crypto-assets, especially their volatility, by being backed by real assets. But even with Stablecoins, the whole crypto-asset payment chain remains highly exposed to a range of risks, from legal, financial and operational risks, to major vulnerabilities in terms of money laundering and terrorist financing, and consumer and investor information and protection issues, including a non-zero risk of capital loss even in the case of Stablecoins. There are also issues, in our countries upholding the Rule of Law and in our regulated market economies, in terms of complying with core competition and privacy principles.
B.    Fostering “co-opetition” between established players and new entrants
Innovation is often associated with FinTech firms and challengers, such as the start-ups that build success from an ability to focus their business and cut costs for a specific service or link in the payment chain. Yet commercial banks, which have traditionally been a major force in payments, also play a key role in innovation. Likewise, the main card schemes helped to drive the emergence of new payment methods, such as contactless payments and mobile payment terminals.
Through partnerships, acquisitions and incubation projects, but also by harnessing in house R&D, established participants have expanded their service offerings to add new solutions, while developing competition and cooperation with new entrants. “Co-opetition” relationships are a deep-rooted feature of the payment industry and are proven to generate value. The challenge now is to nurture them over the long run, taking care to ensure that relationships with BigTech firms are included.
This is because the potential network effects enjoyed by BigTech payment solutions and the upstream payment chain positions of these firms could create risks of competitive distortion, particularly in situations where these participants also provide hardware or software components. Users could find themselves effectively captives of an ecosystem and left with no choice in terms of payment service, or at least be influenced by BigTech firms to use their services at the expense of competitors. This market power might also lead to high fees for payment transactions that could reduce the revenues – and hence the innovative capabilities – of partner banks.
C.    Consolidate European integration and sovereignty in the area of payments 
The limits of Europe’s integration and sovereignty in the area of payments have been highlighted once again by the entry of tech giants into the field of payments and the emergence of a systemically important project such as the Libra/Diem initiative, which could see non-European participants providing new solutions on the European market.
Although implementation of the Single Euro Payments Area (SEPA) project was beneficial in supporting defragmentation for credit transfers and direct debits, non-European participants have been able to leverage regulatory harmonisation in their efforts to conquer the entire European market, whereas domestic participants have struggled to expand beyond their country of origin.
Meanwhile, European integration in the area of card payments has failed. The so called international card schemes exclusively manage all cross-border payments within the European Union, not to mention a large share of domestic payments. This situation has created a dependency with multiple consequences. I am talking particularly about the definition and control of technical standards, financial aspects, but also challenges related to payment data, i.e. our capacity to protect these data and enforce compliance with European standards such as the GDPR, if decision-making centres are based outside Europe.
II/ What is the Banque de France doing?
To help to meet these challenges, we at Banque de France are focusing our activities around two main areas:
1/ Support and implement regulatory frameworks and supervisory practices that promote innovation and the stability of our financial system 
Most of the current regulatory framework predates the technological breakthroughs that we are now facing. Accordingly, it makes sense to adjust the regulatory framework to these technological developments, the challenges they present and the attendant risks. The same naturally applies to our supervisory framework and methods. For this reason, we are actively involved in multilateral cooperation work, such as the G7, the G20, the Financial Stability Board and the Committee on Payments and Market Infrastructures, particularly on crypto-assets and enhancing cross-border payments.
We are also supporting the European strategies on digital finance and retail payments published by the Commission in the final quarter of 2020 and especially the two flagship initiatives, namely the draft Markets in Crypto-Assets (MiCA) Regulation and the future Digital Operational Resilience Act (DORA) Regulation on operational risks in the financial sector.
2/ Be involved as a participant in the evolution of payment systems
However, adapting the regulatory framework will not be enough. At the Banque de France, we believe we also need to be part of the evolution of payment systems by pursuing, at this stage, two goals: facilitate and experiment.
As regards the first of these goals, we want to build on the major integration projects that have come before and promote the emergence of European initiatives that can strengthen Europe’s payment market.
Right now, just one initiative looks capable of providing a satisfactory response to the challenges: the European Payments Initiative, or EPI.
With this initiative now under way, we feel that it is vital for EPI to make good on its promises.
On the experimental front, the Banque de France is currently conducting a programme exploring the use of a central bank digital currency (CBDC) to settle interbank transactions, to assess to what extent and under what conditions such a currency could make the settlement of financial-asset transactions safer and more efficient, while at the same time preserving the fundamental role of central bank money in the proper execution of these transactions.
The Banque de France is also playing a very active role in the Eurosystem work, under the aegis of the ECB, on a retail digital euro. An ECB report published in October 2020 said that the Eurosystem should get prepared for the swift introduction of a retail digital euro should the need arise. The Eurosystem held a public consultation that closed in late January, attracting over 8,000 responses. The input from this will inform the meticulous examination of the reasons, consequences and prerequisites for the potential introduction of a CBDC that we are conducting. A first report will be presented by summer 2021 to the Governing Council, which will then decide whether to extend the analytical work by carrying out an investigatory phase.
In the end, the challenge is to determine whether and in what way a central bank digital euro is necessary. Key areas of analysis include a consideration of ways to prevent a digital euro from leading to excessive conversion of bank deposits into CBDC, which could disrupt bank refinancing and banks’ capacity to lend to the real economy, in turn destabilising the financial system and financing of the economy. A report published by the Bank for International Settlements and seven central banks in October 2020 stressed that three foundational principles must govern any CBDC-related decisions: do not compromise overarching public policy objectives such as monetary and financial stability; organise coexistence with other forms of public and private money; and promote innovation and efficiency in the financial system.
If the decision were taken to introduce a central bank digital euro, this currency would also have to help to strengthen the sovereignty and competitiveness of the European payment market, while interacting smoothly with EPI. Finally, we believe there is a form of continuity between a retail CBDC and an interbank CBDC: logically, a retail digital euro should be able to rely on a CBDC for interbank settlement purposes to support optimal circulation.
Conclusion
Unquestionably, the trend towards greater digitalisation of the economy, which has accelerated to an unprecedented degree since the onset of the health crisis, has illustrated the payment ecosystem’s ability to adjust to the health restrictions affecting our economy on an everyday basis. But this positive assessment must not cause us to overlook the challenges connected with payment innovation, which touch on issues of safety, accessibility, competition and sovereignty. At the Banque de France, we are committed to supporting the development of an independent, innovative and resilient European payment market that can maintain confidence in the currency while also strengthening our monetary and financial sovereignty.
This commitment, which stems from our core statutory tasks, has a central place in the roadmap followed by our institution. As you may have seen in the annual report that we published a few days ago, payments have their rightful place in the Banque de France’s strategic guidelines for 2024, with three initiatives centred on modern, safe payments and on maintaining confidence in the currency in all its forms more broadly.
Thank you for your attention.
Compliments of the Banque de France.
The post Speech | Navigating the Digital Transition, Maintaining a Stable Payment System first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.