(Adds more comments from Leduc, paragraphs 7-12)
TORONTO, May 25 (Reuters) - Modernizing Canada's aging payments systems will help strengthen the stability and efficiency of the country's financial system and reduce systemic and liquidity risk, a senior official at the Bank of Canada said on Thursday.
In a speech that mentioned monetary policy only in passing, Deputy Governor Sylvain Leduc said that while the fast pace of technological change makes updating the high-value payment system challenging, inaction is not an option.
Leduc said a sound payments system is as important for the stability of the financial system as a reliable electrical grid is for the economy.
"And a stable financial system is essential for the effective conduct of our inflation-targeting monetary policy," Leduc said in prepared remarks to a Payments Canada conference in Toronto.
"We do not expect the changes to the high-value payment system to alter our ability to control the overnight rate, which should closely track our target policy rate, as is the case today," he added.
Like most central banks, the Bank of Canada is mandated to oversee the country's main large-value and retail payments systems, which are operated by Payments Canada, a non-profit organization established by Canada's parliament.
Leduc said Canada's payments systems are showing their age but Payments Canada is making "steady progress" on a modernization plan that will take several years to complete - and the Bank of Canada is working closely to provide input at all levels.
The goal is to develop a new system that is fast, flexible and secure, as well as fully aligned with global regulatory standards, and which has the architecture to allow for future innovations, Leduc said.
He said the Bank envisages the new high-value payment system will be a fully collateralized, defaulter-pays system.
"While we are ready to consider different designs consistent with this vision, an RTGS (real-time gross settlement) system with liquidity-saving mechanisms may provide a relatively simpler and well-tested framework," Leduc said.
In outlining the risks to payments system that arise from liquidity or operational failures, Leduc said systemic risk can arise when the inability of one institution to settle a payment produces a domino effect, or financial contagion, by triggering a similar inability at other institutions.
"A bank that defaults or experiences a technical failure will not bear the costs of these events on its own. Other financial institutions will also be affected," he said.