Liquidity Efficiency and Distribution in the LVTS: Non-Neutrality of System Changes under Network Asymmetry
AbstractThe 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 InfoPaper provided by Bank of Canada in its series Discussion Papers with number 08-11.
Length: 47 pages
Date of creation: 2008
Date of revision:
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Payment; clearing; and settlement systems; Financial services; Financial institutions;
Find related papers by JEL classification:
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-08-06 (All new papers)
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