timewhenitishonoured isofnopractical significance inrespect ofthe underlying obligation. E.Rulesonfinality andsystemrisk 97.Systemriskisthedangerthatthebanking system as awholewillbe severely damaged bythefailure ofoneormorebankstosettleforthe transfers theyhavemade. Afailure tosettleisalmost always aconsequence ofproblems external tothefundstransfer process. However, therecent development ofon-line high-value netsettlement electronic clearing-houses through whichparticipating banksoftensendinone day fundstransfer instructions formorethantheirentirecapital andsurplus increases therisk thatabankwillendthedaywithadebitbalance forwhichitcannotsettle. Futhermore, thelargerthedebitbalance forwhichabankfailstosettle, the greater theimpactontheotherbanksintheclearing-house, onthebanking system and ontheeconomy ingeneral. 98.Theextenttowhichabanking systemcanabsorb abank'sfailure to settledepends notonlyonthesizeofthedebitbalance forwhichitfailsto settle, butalsoontheallocation ofthelossbetween theotherparticipants inthefundstransfer system, including thenon-bank customers ofthebanks involved. Amongtherulesallocating losstotheparticipants inthefunds transfer systemaretherules&overning finality. Inturn,therules governing finality oflarge-value fundstransfers haveanimportant effecton thefinancial markets andlargecommercial transactions forwhichthese transfers aremade.A/CN.9/266/Add.l English Page26 99.Thepublicdiscussion oftheissuehasbeenconcentrated intheUnited stateswherethereareseveral on-line large-value systems inoperation. The factthatthesesystems havedifferent finality rulesleadstodifferent possibilities andtechniques forlimiting systemrisk.Theissuehasalso beenaddressed intheUnited Kingdom wherethenatureofthebanking system hasledtoyetothersolutions totheproblem. Because thediscussion mustof necessity treattheissueseparately foreachcountry, ithasbeenplacedin theAnnextothischapter. • •• •A/CN.9/266/Add.l English Page27 Annex Mational experience inreducing systemrisk A. The natureoftheproblem 1.Ingeneral 1.Hi,h-value electronic fundstransfers, whichareatpresent usually credit tranlfers~ areltkelytocreateriskforseveral reasons. Themostobvious is thatthevalueoftheindividual transfers, thetotalvalueoftransfers made ina dayand,mostimportantly, thesizeofthenetdebitorcreditbalance of anindividual bankwithanyotherbankorwiththebanking systemas awhole durin,orattheendofthedayare,reatly increased. Asecondimportant realonisthat,sincetransferors aremoreinterested inhavingtheir lar,e-,value fundstransfers completed quickly, large-value transfers are ,enerally made as same-day transfers. Asaresult, thetimeallowable before .ettlement hasbeenshortened andbankshavelesstimethaninearlier daysto mobillze fundstomeettheirdebitbalances. Foreign banks,orlocalbranches offorei,n banks.mayhavemoredifficulties thandodomestic banksinfunding theirpositions, especially iftheforeikn bankscannotobtaincreditfromthe eent.ral bank. r 2.Correspondent banksettlement 2.Hi,h-value credittransfers madethrou,h correspondent bankrelationships canofferrapidsettlement wit.hlittleornosystemriskundermost circumstances. Whenthereceiving bankreceives valuefromthesending bank atthesametimethatitreceives thecredittransfer instruction. whichis t.ypical whenthebanksmaintain accounts withoneanother. thereceiving bank canliveirrevocable credittothecreditpartyimmediately without risk. Whent.hereceivln, bankdoesnotreceive valueimmediately, itmayhavethe rl,httodelayhonouring thefundstransfer instruction unt.ilitreceives value,collateral islivenorthereisaguarantee ofreimbursement from a reputable source. Sincethereisnounsecured extension ofcreditarisin, out ofthefundstransfer, thereisnorisktothereceiving bankand.therefore, nosystemrisk.However, thisconclusion issubject totheimportant qualification that,whentherecetvin, bankistheaccount servicing bank and theinstructions todebitorcredittheaccount ofthesending bank,i.e.the account ownerbank,aresentorreceived by a number ofdepartments ofthe receivin, bankinaddition tothefundstransfer department, itcan make rational creditdecisions onlyifallitsdepartments reportalltransactions promptly. Whenlar,esumsofmoneyareinvolved, thismaycallfor transactions fromalldepartments tobeentered inreal-time to~heaccount. 3.Somecorrespondent. bankrelationships require thereceiving banktogive
**Analysis**
The text discusses the concept of system risk in the banking system, particularly in the context of large-value fund transfers. It highlights the importance of finality rules and the allocation of losses among participants in the fund transfer system. The text also touches on the national experience in reducing system risk, mentioning the differences in approaches between the United States and the United Kingdom.

**Category**
Industry, Transport and communication