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Understanding intraday credit in large-value payment systems

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Ruilin Zhou

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Abstract

This article explains how large-value payment systems work, using either gross or net settlement. The author discusses risk control in a real-time gross settlement system and analyzes the pricing of credit to provide intraday liquidity. She argues for distinguishing between consumption/investment debt and payment debt. A theoretical model suggests that, under the assumption that there are no opportunities for intraday optimization of consumption and production, the risk-free rate on intraday payment credit should be zero. This is because the cost of intraday liquidity is a transaction cost of the underlying goods/assets trade and, thus, should be minimized.

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Article provided by Federal Reserve Bank of Chicago in its journal Economic Perspectives.

Volume (Year): (2000)
Issue (Month): Q III ()
Pages: 29-44
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Handle: RePEc:fip:fedhep:y:2000:i:qiii:p:29-44:n:v.25no.3

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Related research
Keywords: Payment systems ; Credit ; Debt ; Liquidity (Economics);

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  1. James T. E. Chapman, 2008. "Policy Coordination in an International Payment System," Working Papers 08-17, Bank of Canada. [Downloadable!]
  2. repec:bep:mactop:v:3:y:2003:i:1:p:1052-1052 is not listed on IDEAS
  3. Antoine Martin & Cyril Monnet, 2008. "Monetary policy implementation frameworks: a comparative analysis," Staff Reports 313, Federal Reserve Bank of New York. [Downloadable!]
  4. 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. [Downloadable!]
  5. David C. Mills, Jr., 2005. "Alternative central bank credit policies for liquidity provision in a model of payments," Finance and Economics Discussion Series 2005-55, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  6. Simon Buckle & Erin Campbell, . "Settlement bank behaviour and throughput rules in an RTGS payment system with collateralised intraday credit," Bank of England working papers 209, Bank of England. [Downloadable!]
  7. David C. Mills, Jr, 2004. "Mechanism Design and the Role of Enforcement in Freeman's Model of Payments," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(1), pages 219-236, january. [Downloadable!] (restricted)
  8. James T. E. Chapman & Antoine Martin, 2007. "Rediscounting under aggregate risk with moral hazard," Staff Reports 296, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  9. William Roberds & Charles M. Kahn, 2004. "Payments Settlement under Limited Enforcement: Private versus Public Systems," Econometric Society 2004 North American Winter Meetings 13, Econometric Society. [Downloadable!]
    Other versions:
  10. Angelo Baglioni & Andrea Monticini, 2005. "The intraday price of money: evidence from the e-MID market," Finance 0507020, EconWPA. [Downloadable!]
  11. Ed Nosal & Guillaume Rocheteau, 2006. "The economics of payments," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Feb. [Downloadable!]
  12. Antoine Martin, 2002. "Optimal pricing of intra-day liquidity," Research Working Paper RWP 02-02, Federal Reserve Bank of Kansas City. [Downloadable!]
    Other versions:
  13. Morten Bech & Rod Garratt, 2001. "The Intraday Liquidity Management Game," University of California at Santa Barbara, Economics Working Paper Series 18-01, Department of Economics, UC Santa Barbara. [Downloadable!]
    Other versions:
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