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Risk and concentration in payment and securities settlement systems

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  • Mills Jr., David C.
  • Nesmith, Travis D.

Abstract

What drives the intraday patterns of settlement in payment and securities settlement systems? Using a model of the strategic interaction of participants in these systems to capture some stylized facts about the Federal Reserve's Fedwire funds and securities systems, this paper identifies three factors that influence a participant's decision on when to send transactions intraday: cost of intraday liquidity, extent of settlement risk, and system design. With these factors, the model can make predictions regarding the impact of policy on the concentration of transactions, amount of intraday overdrafts, central bank credit exposure, costs to system participants, and other risks.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 55 (2008)
Issue (Month): 3 (April)
Pages: 542-553

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Handle: RePEc:eee:moneco:v:55:y:2008:i:3:p:542-553

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Web page: http://www.elsevier.com/locate/inca/505566

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References

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  1. Edward J. Green, 1996. "Money and Debt in the Structure of Payments," Macroeconomics 9609002, EconWPA, revised 09 Sep 1996.
  2. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
  3. Charles M. Kahn & James McAndrews & William Roberds, 1999. "Settlement risk under gross and net settlement," Working Paper 99-10, Federal Reserve Bank of Atlanta.
  4. Stacy Panigay Coleman, 2002. "The evolution of the Federal Reserve's intraday credit policies," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Feb, pages 67-84.
  5. Angelini, P. & Maresca, G. & Russo, D., 1996. "Systemic risk in the netting system," Journal of Banking & Finance, Elsevier, vol. 20(5), pages 853-868, June.
  6. David C. Mills, Jr. & Travis D. Nesmith, 2007. "Risk and concentration in payment and securities settlement systems," Finance and Economics Discussion Series 2007-62, Board of Governors of the Federal Reserve System (U.S.).
  7. Heidi Willmann Richards, 1995. "Daylight overdraft fees and the Federal Reserve's payment system risk policy," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Dec, pages 1065-1077.
  8. Bech, Morten L. & Garratt, Rod, 2003. "The intraday liquidity management game," Journal of Economic Theory, Elsevier, vol. 109(2), pages 198-219, April.
  9. Furfine, Craig H, 2003. " Interbank Exposures: Quantifying the Risk of Contagion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(1), pages 111-28, February.
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Citations

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Cited by:
  1. Tom Roberts, 2011. "The Impact of Operational Events on the Network Structure of the LVTS," Discussion Papers 11-7, Bank of Canada.
  2. Merrouche, Ouarda & Schanz, Jochen, 2009. "Banks' intraday liquidity management during operational outages: theory and evidence from the UK payment system," Bank of England working papers 370, Bank of England.
  3. David Marshall & Robert Steigerwald, 2013. "The role of time-critical liquidity in financial markets," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 30-46.
  4. Angelo Baglioni & Andrea Monticini, 2008. "The intraday interest rate under a liquidity crisis: the case of August 2007," DISCE - Quaderni dell'Istituto di Economia e Finanza ief0083, UniversitĂ  Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  5. Antoine Martin & James McAndrews, 2008. "Should there be intraday money markets?," Staff Reports 337, Federal Reserve Bank of New York.
  6. Andrea Monticini & Francesco Ravazzolo, 2011. "Forecasting the intraday market price of money," Working Paper 2011/06, Norges Bank.
  7. Mills Jr., David C. & Nesmith, Travis D., 2008. "Risk and concentration in payment and securities settlement systems," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 542-553, April.
  8. Antoine Martin & James McAndrews, 2008. "An economic analysis of liquidity-saving mechanisms," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 25-39.
  9. Angelo Baglioni & Andrea Monticini, 2013. "Why Does the Interest Rate Decline Over the Day? Evidence from the Liquidity Crisis," Journal of Financial Services Research, Springer, vol. 44(2), pages 175-186, October.
  10. Huberto M. Ennis & John A. Weinberg, 2007. "Interest on reserves and daylight credit," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 111-142.
  11. Antoine Martin & James McAndrews, 2008. "A study of competing designs for a liquidity-saving mechanism," Staff Reports 336, Federal Reserve Bank of New York.
  12. Morten L. Bech & Antoine Martin & James McAndrews, 2012. "Settlement liquidity and monetary policy implementation—lessons from the financial crisis," Economic Policy Review, Federal Reserve Bank of New York, issue Mar, pages 3-20.
  13. repec:fip:fedhep:y:2013:i:qii:p:30-46:n:vol.37no.2 is not listed on IDEAS
  14. David Mills & Samia Husain, 2013. "Interlinkages between payment and securities settlement systems," Annals of Finance, Springer, vol. 9(1), pages 61-81, February.
  15. Enghin Atalay & Antoine Martin & James McAndrews, 2008. "The welfare effects of a liquidity-saving mechanism," Staff Reports 331, Federal Reserve Bank of New York.

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