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Payment prioritisation and liquidity risk in collateralised interbank payment systems

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  • De Caux, Robert
  • Brede, Markus
  • McGroarty, Frank

Abstract

Participants in interbank payment systems manage a stream of payment requests of varying priority to minimise their total costs. However, individually optimal strategies may conflict with system-wide optimality and can lead to inefficient equilibria, where banks cannot meet obligations in a timely manner. We construct a model of a collateralised payment system and demonstrate that socially optimal states exist in which banks should delay a proportion of non-priority payments in an internal queue, but banks’ strategising behaviour leads to liquidity hoarding and increased systemic cost. We discuss how this behaviour can be reduced using measures available to a regulator.

Suggested Citation

  • De Caux, Robert & Brede, Markus & McGroarty, Frank, 2016. "Payment prioritisation and liquidity risk in collateralised interbank payment systems," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 41(C), pages 139-150.
    • Handle: RePEc:eee:intfin:v:41:y:2016:i:c:p:139-150
    DOI: 10.1016/j.intfin.2015.12.009
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