The design of wholesale payments networks: the importance of incentives
AbstractMost people are familiar with retail payments systems such as checks and credit cards. Less familiar are wholesale payments systems, which consist of electronic networks used for sending large sums among banks. A feature common to all wholesale networks is that settlement is carried out by exchange of funds held in banks' reserve accounts at a central bank, though the rules for settlement vary. This article considers the question of what is the best design for a wholesale payments system, in particular whether it should settle on a net or a real-time gross basis, and some of the difficult policy questions facing both participants and regulators of wholesale systems. ; The authors show that for the benchmark case in which bank asset quality is fixed and bank assets can always be liquidated at book value, the advantages of some type of net settlement dominate real-time gross settlement. However, the optimal net settlement scheme may necessarily involve some chance of default. The discussion also examines the case in which the quality of bank assets is a choice variable and finds that the potential costs of net settlement rise because of negative effects on bank asset quality. The authors conclude that the design of a wholesale payments system must take into account numerous policy trade-offs, the most critical being the one between the costs of liquidity versus the costs of default.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Federal Reserve Bank of Atlanta in its journal Economic Review.
Volume (Year): (1999)
Issue (Month): Q3 ()
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Selgin, George, 2004. "Wholesale payments: questioning the market-failure hypothesis," International Review of Law and Economics, Elsevier, vol. 24(3), pages 333-350, September.
- 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.
- Cronin, David, 2011. "Large-Value Payment System Design and Risk Management," Quarterly Bulletin Articles, Central Bank of Ireland, pages 78-88, January.
- ANTOINE MARTIN & JAMES McANDREWS, 2010.
"Should There Be Intraday Money Markets?,"
Contemporary Economic Policy,
Western Economic Association International, vol. 28(1), pages 110-122, 01.
- Antoine Martin, 2002.
"Optimal pricing of intra-day liquidity,"
Research Working Paper
RWP 02-02, Federal Reserve Bank of Kansas City.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Meredith Rector).
If references are entirely missing, you can add them using this form.