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Economizing on liquidity with deferred settlement mechanisms

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Author Info
Kurt Johnson
James J. McAndrews
Kimmo Soramaki

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Abstract

Credit extensions to banks using the Fedwire Funds Service-the Federal Reserve's real-time gross settlement (RTGS) payments system-can reach intraday peaks as high as $86 billion. This article evaluates the effectiveness of alternative methods of settling Fedwire payments in reducing intraday credit extensions. The authors simulate three deferred settlement mechanisms that complement RTGS systems: one-hour netting, six-hour netting, and a mechanism called a receipt-reactive gross settlement (RRGS) system. Their results suggest that in conjunction with RTGS systems, the RRGS mechanism could significantly reduce daylight credit extensions while modestly delaying the average time of payment settlement. Moreover, certain features of RRGS systems may encourage banks to submit payments earlier in the day. Further research on RRGS systems may shed light on whether they could prove to be a true liquidity-saving complement to real-time gross settlement systems.

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Publisher Info
Article provided by Federal Reserve Bank of New York in its journal Economic Policy Review.

Volume (Year): (2004)
Issue (Month): Dec ()
Pages: 51-72
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Handle: RePEc:fip:fednep:y:2004:i:dec:p:51-72:n:v.10no.3

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Related research
Keywords: Liquidity (Economics) Clearinghouses (Banking) Fedwire Payment systems

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Angelini, Paolo, 1998. "An analysis of competitive externalities in gross settlement systems," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 1-18, January. [Downloadable!] (restricted)
  2. Bech, Morten L. & Garratt, Rod, 2003. "The intraday liquidity management game," Journal of Economic Theory, Elsevier, vol. 109(2), pages 198-219, April. [Downloadable!] (restricted)
    Other versions:
  3. William Roberds, 1993. "The rise of electronic payments networks and the future role of the Fed with regard to payment finality," Economic Review, Federal Reserve Bank of Atlanta, issue Mar, pages 1-22.
  4. repec:fth:bfdipa:16/99 is not listed on IDEAS
  5. Koponen, R. & Soramaki, K., 1998. "Intraday Liquidity Needs in a Modern Interbank Payment System. A Simulation Approach," Bank of Finland - Studies in Economics and Finance e14, Bank of Finland. Research Department..
  6. James McAndrews & Samira Rajan, 2000. "The timing and funding of Fedwire funds transfers," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 17-32. [Downloadable!]
  7. Bech , Morten L. & Soramäki, Kimmo, 2001. "Gridlock Resolution in Interbank Payment Systems," Research Discussion Papers 9/2001, Bank of Finland. [Downloadable!]
  8. repec:fth:bfdipa:9/2001 is not listed on IDEAS
  9. Leinonen, Harry & Soramäki, Kimmo, 1999. "Optimizing Liquidity Usage and Settlement Speed in Payment Systems," Research Discussion Papers 16/1999, Bank of Finland. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Antoine Martin & James McAndrews, 2007. "Liquidity-saving mechanisms," Staff Reports 282, Federal Reserve Bank of New York. [Downloadable!]
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