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Banks' intraday liquidity management during operational outages: Theory and evidence from the UK payment system

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  • Merrouche, Ouarda
  • Schanz, Jochen

Abstract

We investigate how settlement banks in the United Kingdom's large-value payment system deal with intraday liquidity and operational risk. In particular, we are interested in payments behaviour towards a bank that is, for operational reasons, unable to make but able to receive payments. If other banks did not sufficiently monitor their outgoing payments, these operational shocks could impact the entire payment system because the affected bank could absorb liquidity from the system. Our game-theoretic model predicts that only early in the day, when they are uncertain about the payment instructions they might have to execute, banks stop sending payments to a counterparty which is unable to make payments. Using a non-parametric method, we find that this prediction is supported by the data, implying that banks effectively contain the disruption caused by the operational outage: payment flows between healthy banks remain unaffected.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 34 (2010)
Issue (Month): 2 (February)
Pages: 314-323

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Handle: RePEc:eee:jbfina:v:34:y:2010:i:2:p:314-323

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Web page: http://www.elsevier.com/locate/jbf

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Keywords: Payment system Operational outages Liquidity sink;

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Cited by:
  1. Simplice A. Asongu, 2013. "Post-crisis bank liquidity risk management disclosure," Qualitative Research in Financial Markets, Emerald Group Publishing, vol. 5(1), pages 65-84, March.
  2. Clara Lia Machado & Carlos León & Miguel Sarmiento & Orlando Chipatecua, 2010. "Riesgo Sistémico y Estabilidad del Sistema de Pagos de Alto Valor en Colombia: Análisis bajo Topología de Redes y Simulación de Pagos," BORRADORES DE ECONOMIA 007669, BANCO DE LA REPÚBLICA.
  3. Foote, Elizabeth, 2014. "Information asymmetries and spillover risk in settlement systems," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 179-190.
  4. Benos, Evangelos & Garratt, Rodney & zimmerman, Peter, 2012. "Bank behaviour and risks in CHAPS following the collapse of Lehman Brothers," Bank of England working papers 451, Bank of England.
  5. Pokutta, Sebastian & Schmaltz, Christian, 2011. "Managing liquidity: Optimal degree of centralization," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 627-638, March.
  6. Ashwin Clarke & Jennifer Hancock, 2012. "Payment System Design and Participant Operational Disruptions," RBA Research Discussion Papers rdp2012-05, Reserve Bank of Australia.
  7. Tom Roberts, 2011. "The Impact of Operational Events on the Network Structure of the LVTS," Discussion Papers 11-7, Bank of Canada.

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