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A study of competing designs for a liquidity-saving mechanism

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  • Martin, Antoine
  • McAndrews, James

Abstract

We study two designs for a liquidity-saving mechanism (LSM), a queuing arrangement used with an interbank settlement system. With a balance-reactive LSM, banks can set a balance threshold below which payments are not released from the queue, an action not possible with a receipt-reactive LSM. Payments that are costly to delay are settled earlier with a receipt reactive LSM. Payments that are not costly to delay may be queued with a balance reactive LSM but are always delayed with a receipt reactive LSM. We show that either system can provide higher welfare.

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Bibliographic Info

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

Volume (Year): 34 (2010)
Issue (Month): 8 (August)
Pages: 1818-1826

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Handle: RePEc:eee:jbfina:v:34:y:2010:i:8:p:1818-1826

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

Related research

Keywords: Liquidity-saving mechanisms Real-time gross settlement Large-value payment systems;

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References

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  17. Leinonen (ed), Harry, 2007. "Simulation studies of liquidity needs, risks and efficiency in payment networks," Scientific Monographs E:39/2007, Bank of Finland.
  18. Kurt Johnson & James J. McAndrews & Kimmo Soramaki, 2004. "Economizing on liquidity with deferred settlement mechanisms," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 51-72.
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Citations

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Cited by:
  1. Humphrey, David B., 2010. "Retail payments: New contributions, empirical results, and unanswered questions," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1729-1737, August.
  2. Pokutta, Sebastian & Schmaltz, Christian, 2011. "Managing liquidity: Optimal degree of centralization," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 627-638, March.

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