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Settlement Risk under Gross and Net Settlement

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Author Info
Kahn, Charles M
McAndrews, James
Roberds, William

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Abstract

Previous comparative analyses of gross and net settlement have focused on the credit risk of the central counterparty in net settlement arrangements and on the incentives for participants to alter the risk of their portfolios under net settlement. By modeling the trading economy that generates the demand for payment services, we are able to show some largely unexplored advantages of net settlement. We find that net settlement can prevent certain gridlock situations, which may arise in gross settlement in the absence of delivery versus payment requirements. In addition, we show that net settlement can economize on collateral requirements and avoid trading delays.

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Publisher Info
Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 35 (2003)
Issue (Month): 4 (August)
Pages: 591-608
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Handle: RePEc:mcb:jmoncb:v:35:y:2003:i:4:p:591-608

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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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.:
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    Other versions:
  2. Angelini, P. & Giannini, C., 1993. "On the Economics of Interbank Payment Systems," Papers 193, Banca Italia - Servizio di Studi.
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  7. D. F. I. Folkerts-Landau & Peter M. Garber & Dirk Schoenmaker, 1996. "The Reform of Wholesale Payment Systems and its Impact on Financial Markets," IMF Working Papers 96/37, International Monetary Fund.
  8. Nobuhiro Kiyotaki & John Moore, 2004. "Credit Chains," ESE Discussion Papers 118, Edinburgh School of Economics, University of Edinburgh.
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  10. Xavier Freixas & Bruno Parigi & Jean Charles Rochet, 1998. "Systemic Risk, Interbank Relations and Liquidity Provision by the Central Bank," Economics Working Papers 440, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 1999. [Downloadable!]
    Other versions:
  11. Kahn, Charles M & Roberds, William, 1998. "Payment System Settlement and Bank Incentives," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 11(4), pages 845-70.
    Other versions:
  12. Marvin S. Goodfriend, 1988. "Money, credit, banking, and payment system policy," Proceedings, Federal Reserve Bank of Richmond, pages 247-284.
    Other versions:
  13. Herbert L. Baer & Virginia Grace France & James T. Moser, 1995. "Determination of collateral deposits by bilateral parties and clearinghouses," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 525-546.
  14. Freixas, Xavier & Parigi, Bruno, 1998. "Contagion and Efficiency in Gross and Net Interbank Payment Systems," Journal of Financial Intermediation, Elsevier, vol. 7(1), pages 3-31, January. [Downloadable!] (restricted)
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  18. James McAndrews & William Roberds, 1999. "Payment intermediation and the origins of banking," Staff Reports 85, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  19. Charles M. Kahn & William Roberds, 1999. "Real-time gross settlement and the costs of immediacy," Working Paper 98-21, Federal Reserve Bank of Atlanta. [Downloadable!]
    Other versions:
Full references

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. Morten L. Bech & Bart Hobijn, 2007. "Technology Diffusion within Central Banking: The Case of Real-Time Gross Settlement," International Journal of Central Banking, International Journal of Central Banking, vol. 3(3), pages 147-181, September. [Downloadable!]
    Other versions:
  2. Morten L. Bech & Rod Garratt, 2006. "Illiquidity in the interbank payment system following wide-scale disruptions," Staff Reports 239, Federal Reserve Bank of New York. [Downloadable!]
  3. Baris Serifsoy & Marco Weiß, 2007. "Settling for Efficiency - A Framework for the European Securities Transactions Industry," Working Paper Series: Finance and Accounting 151, Department of Finance, Goethe University Frankfurt am Main. [Downloadable!]
    Other versions:
  4. Edgardo Barandiarán, 2000. "Chile Después del Peso: Viviendo con el Dólar," Cuadernos de Economía (Latin American Journal of Economics), Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 37(110), pages 241-267. [Downloadable!]
  5. David C. Mills, Jr. & Travis D. Nesmith, 2007. "Risk and concentration in payment and securities settlement systems," Finance and Economics Discussion Series 2007-62, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  6. Edward S. Prescott & John A. Weinberg, 2000. "Incentives, communication, and payment instruments," Working Paper 00-11, Federal Reserve Bank of Richmond. [Downloadable!]
    Other versions:
  7. Jonathan Chiu & Alexandra Lai, 2007. "Modelling Payments Systems: A Review of the Literature," Working Papers 07-28, Bank of Canada. [Downloadable!]
  8. Olivier Armantier & Jeffrey Arnold & James McAndrews, 2008. "Changes in the timing distribution of Fedwire funds transfers," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 83-112. [Downloadable!]
  9. Stephen Millard, 2007. "The foundations of money, payments and central banking: A review essay," Money Macro and Finance (MMF) Research Group Conference 2006 106, Money Macro and Finance Research Group. [Downloadable!]
  10. Kari Kemppainen, 2004. "Competition and regulation in European retail payment systems," Microeconomics 0404008, EconWPA. [Downloadable!]
  11. Nilssen,T., 2000. "Risk externalities in a payments oligopoly," Memorandum 10/2000, Oslo University, Department of Economics. [Downloadable!]
  12. Baris Serifsoy & Marco Weiß, 2003. "Efficient Systems for the Securities Transaction Industry- A Framework for the European Union," Working Paper Series: Finance and Accounting 120, Department of Finance, Goethe University Frankfurt am Main. [Downloadable!]
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