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Liquidity Efficiency and Distribution in the LVTS: Non-Neutrality of System Changes under Network Asymmetry

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Author Info

  • Sean O'Connor
  • James Chapman
  • Kirby Millar

Abstract

The authors consider the liquidity efficiency of Tranche 2 of the Large Value Transfer System (LVTS T2) by examining, through an empirical analysis, some plausible strategic reactions of individual participants to a systemwide shock to available liquidity in the system. The network structure of the LVTS T2 is found to be asymmetric in terms of the patterns of out-payment flows. It is composed of three subgroups, in which participants within a subgroup are more strongly linked with each other than with participants in other subgroups. Three possible network equilibria are proposed. The equilibria are defined in terms of participant-specific collateral needs and out-payment delays, and result from different relative cost structures involving collateral costs, queuing costs, and payment delay penalties. Each of the conjectural equilibria relate to a dominant strategy for at least those participants most central in the network with respect to liquidity transfer adopted network-wide as a common strategy.

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Bibliographic Info

Paper provided by Bank of Canada in its series Discussion Papers with number 08-11.

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Length: 47 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:bca:bocadp:08-11

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Related research

Keywords: Payment; clearing; and settlement systems; Financial services; Financial institutions;

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References

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  1. Martin, Antoine & McAndrews, James, 2008. "Liquidity-saving mechanisms," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 554-567, April.
  2. Darcey McVanel, 2005. "The Impact of Unanticipated Defaults in Canada's Large Value Transfer System," Working Papers 05-25, Bank of Canada.
  3. Bech, Morten L. & Garratt, Rod, 2001. "The Intraday Liquidity Management Game," University of California at Santa Barbara, Economics Working Paper Series qt0m6035wg, Department of Economics, UC Santa Barbara.
  4. Devin Ball & Walter Engert, 2007. "Unanticipated Defaults and Losses in Canada's Large-Value Payments System, Revisited," Discussion Papers 07-5, Bank of Canada.
  5. Ballester, Coralio & Calvó-Armengol, Antoni & Zenou, Yves, 2005. "Who’s Who in Networks. Wanted: The Key Player," CEPR Discussion Papers 5329, C.E.P.R. Discussion Papers.
  6. Elisabeth Ledrut, 2007. "Simulating retaliation in payment systems: Can banks control their exposure to a failing participant?," DNB Working Papers 133, Netherlands Central Bank, Research Department.
  7. Morten Bech & James T. E. Chapman & Rod Garratt, 2008. "Which Bank is the "Central" Bank? An Application of Markov Theory to the Canadian Large Value Transfer System," Working Papers 08-42, Bank of Canada.
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Cited by:
  1. James Chapman & Yinan Zhang, 2010. "Estimating the Structure of the Payment Network in the LVTS: An Application of Estimating Communities in Network Data," Working Papers 10-13, Bank of Canada.

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