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Changes in the timing distribution of Fedwire funds transfers

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  • Olivier Armantier
  • Jeffrey Arnold
  • James McAndrews

Abstract

The Federal Reserve's Fedwire funds transfer service - the biggest large-value payments system in the United States - has long displayed a peak of activity in the late afternoon. Theory suggests that the concentration of late-afternoon Fedwire activity reflects coordination among participating banks to reduce liquidity costs, delay costs, and credit risk; as these costs and risk change over time, payment timing most likely will be affected. This article seeks to quantify how the changing environment in which Fedwire operates has affected the timing of payment value transferred within the system between 1998 and 2006. It finds that the peak of the timing distribution has become more concentrated, has shifted to later in the day, and has actually divided into two peaks. The authors suggest that these trends can be explained by a rise in the value of payments transferred over Fedwire, the settlement patterns of the private settlement institutions that use the system, and an increase in industry concentration. Although the study's results provide no specific evidence of heightened operational risk attributable to activity occurring later in the day, they point to a high level of interaction between Fedwire and private settlement institutions.

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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: 83-112

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Handle: RePEc:fip:fednep:y:2008:i:sep:p:83-112:n:v.14no.2

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Keywords: Fedwire ; Payment systems ; Electronic funds transfers;

References

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  1. Charles M. Kahn & James McAndrews & William Roberds, 1999. "Settlement risk under gross and net settlement," Working Paper 99-10, Federal Reserve Bank of Atlanta.
  2. Angelini, Paolo, 2000. "Are Banks Risk Averse? Intraday Timing of Operations in the Interbank Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 54-73, February.
  3. Morten L. Bech, 2008. "Intraday liquidity management: a tale of games banks play," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 7-23.
  4. Bech, Morten L. & Garratt, Rod, 2003. "The intraday liquidity management game," Journal of Economic Theory, Elsevier, vol. 109(2), pages 198-219, April.
  5. Angelini, Paolo, 1998. "An analysis of competitive externalities in gross settlement systems," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 1-18, January.
  6. Beyeler, Walter E. & Glass, Robert J. & Bech, Morten L. & Soramäki, Kimmo, 2007. "Congestion and cascades in payment systems," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 384(2), pages 693-718.
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Citations

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Cited by:
  1. Ota, Tomohiro, 2011. "Intraday two-part tariff in payment systems," Bank of England working papers 428, Bank of England.
  2. Chao Gu & Joseph H. Haslag & Mark Guzman, 2010. "Production, Hidden Action, and the Payment System," Working Papers 1004, Department of Economics, University of Missouri.
  3. 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.
  4. Kahn, Charles M. & Roberds, William, 2009. "Why pay? An introduction to payments economics," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 1-23, January.
  5. Leonardo Bartolini & Spence Hilton & James McAndrews, 2008. "Settlement delays in the money market," Staff Reports 319, Federal Reserve Bank of New York.
  6. 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.
  7. Gara M. Afonso & Hyun Song Shin, 2008. "Systemic risk and liquidity in payment systems," Staff Reports 352, Federal Reserve Bank of New York.
  8. 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.

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