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The timing and funding of CHAPS sterling payments

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  • Christopher Becher
  • Marco Galbiati
  • Merxe Tudela

Abstract

Real-time gross settlement (RTGS) systems such as CHAPS Sterling require large amounts of liquidity to support payment activity. To meet their liquidity needs, RTGS participants borrow from the central bank or rely on incoming payments from other participants. Both options can prove costly -- the latter in particular if participants delay outgoing payments until incoming ones arrive. This article presents an empirical analysis of the timing and funding of payments in CHAPS. The authors seek to identify the factors driving the intraday profile of payment activity and the extent to which incoming funds are used as a funding source, a process known as liquidity recycling. They show that the level of liquidity recycling in CHAPS is high and stable throughout the day, and attribute this result to several features of the system. First, the settlement of time-critical payments provides liquidity to the system early in the settlement day; this liquidity can be recycled for the funding of less urgent payments. Second, CHAPS throughput guidelines provide a centralised coordination mechanism, in effect limiting any tendency toward payment delay. Third, the relatively small direct membership of CHAPS facilitates coordination between members, for example, through the use of bilateral net sender limits. Coordination encourages banks to maintain a relatively constant flux of payments throughout the day. The authors also argue that the high level of recycling helps to reduce liquidity risk, and that the relatively smooth intraday distribution of payments serves to mitigate operational risk associated with highly concentrated payment activity. They note, however, that the benefits of liquidity recycling are not evenly distributed between members of CHAPS.

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Bibliographic Info

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

Volume (Year): (2008)
Issue (Month): Sep ()
Pages: 113-133

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Handle: RePEc:fip:fednep:y:2008:i:sep:p:113-133:n:v.14no.2

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Related research

Keywords: Payment systems ; Bank liquidity ; Risk ; Electronic funds transfers;

References

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

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Cited by:
  1. Perlin, Marcelo & Schanz, Jochen, 2011. "System-wide liquidity risk in the United Kingdom’s large-value payment system: an empirical analysis," Bank of England working papers 427, Bank of England.
  2. Clara Machado & Carlos León & Miguel Sarmiento & Freddy Cepeda, 2011. "Riesgo Sistémico Y Estabilidad Del Sistema De Pagos De Alto Valor En Colombia: Análisis Bajo Topología De Redes Y Simulación De Pagos," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE.
  3. Becher, Christopher & Millard, Stephen & Soramäki, Kimmo, 2008. "The network topology of CHAPS Sterling," Bank of England working papers 355, Bank of England.
  4. Merrouche, Ouarda & Schanz, Jochen, 2010. "Banks' intraday liquidity management during operational outages: Theory and evidence from the UK payment system," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 314-323, February.
  5. Foote, Elizabeth, 2014. "Information asymmetries and spillover risk in settlement systems," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 179-190.
  6. Biliana Alexandrova-Kabadjova & Francisco Solís-Robleda, 2012. "The Mexican Experience in How the Settlement of Large Payments is Performed in the Presence of a High Volume of Small Payments," Working Papers 2012-17, Banco de México.
  7. Denbee, Edward & Norman, Ben, 2010. "The impact of payment splitting on liquidity requirements in RTGS," Bank of England working papers 404, Bank of England.
  8. Hellqvist , Matti & Laine, Tatu, 2012. "Diagnostics for the financial markets – computational studies of payment system: Simulator Seminar Proceedings 2009–2011," Scientific Monographs E:45/2012, Bank of Finland.
  9. 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.

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