Retail Payment Systems
In the OIC Member Countries
31
will also concentrate risks and create interdependencies among its participants. BIS (2012)
identify inherent risks faced by retail payment infrastructures in the following ways: systemic,
legal, credit, general business, custody, investment, operational, as well as liquidity risks.
Systemic risk comes from the inability of one or more participants in the payment systems
environment to perform as expected and thus cause other participants to be unable to meet
their obligations as well. These interdependencies, consequently, can transmit disruptions
beyond a specific payment system and its participants and affect the broader economy.
Legal risk can be defined as the risk of the unexpected application of a law or regulation and
usually result in a loss. Legal risk can also arise if the application of relevant laws and
regulations is uncertain. Legal risk also includes the risk of losses resulting from a delay in the
recovery of financial assets or a freezing of positions resulting from a legal procedure.
Credit risk, which is the risk that a counterparty, whether a participant or other entity, will be
unable to meet fully when its financial obligations are due. Retail payment systems and their
participants may face replacement-cost risk (the risk of loss of unrealised gains on unsettled
transactions with a counterparty) and principal risk (the risk that a counterparty will lose the
full value involved in a transaction, often associated with settlement risk).
General business risks are the risks related to the administration and operation of a payment
system as a business enterprise, excluding those related to the default of a participant or
another entity, such as a settlement bank, global custodian, or another payment system. A
failure to manage general business risk could result in a disruption of a payment systems’
business operations.
Custody risk is the risk of loss on assets held in custody in the event of a custodian’s
insolvency, negligence, fraud, poor administration, or inadequate recordkeeping. Investment
risk is the risk of loss faced by a payment system when it invests its own or its participants’
resources, such as collateral.
Operational risk is the risk that deficiencies in information systems or internal processes,
human errors, management failures, or disruptions from external events will result in the
reduction, deterioration, or breakdown of services provided by a payment system. These
operational failures may lead to consequent delays, losses, liquidity problems, and in some
cases systemic risks.
Liquidity risk is the risk that a counterparty, whether a participant or other entity, will have
insufficient funds to meet its financial obligations as and when expected, although it may be