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The Impact of Operational Events on the Network Structure of the LVTS

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  • Tom Roberts
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    Abstract

    The author uses a quantitative network analysis approach to assess how participants in the Large Value Transfer System (LVTS) respond to partial outages at other banks. Despite the limited number of operational events, benchmarks can be established. For example, the effect of a partial outage at a big six bank that has a net payment balance of $1 billion is estimated to correspond to a decline in connectivity of about 6 or 7 per cent, due to other participants not sending payments to the problem participant. This suggests that participants tend to perceive a partial outage at a counterparty as inconvenient enough to warrant a delaying of payments, at least to the problem participant. There is no strong evidence of systemic effects, whereby participants also delay payments to non-problem counterparties, in an effort to maintain a reasonable liquidity position. Notable events mostly occurred in 2004 or 2005, and the incidence of operational events did not increase over the sample period. The improvement of contingency measures, such as the use of the LVTS Direct Network, possibly contributed in this regard.

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    Bibliographic Info

    Paper provided by Bank of Canada in its series Discussion Papers with number 11-7.

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    Length: 30 pages
    Date of creation: 2011
    Date of revision:
    Handle: RePEc:bca:bocadp:11-7

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    Keywords: Payment; clearing; and settlement systems;

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    1. 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, Elsevier, vol. 34(2), pages 314-323, February.
    2. Mills Jr., David C. & Nesmith, Travis D., 2008. "Risk and concentration in payment and securities settlement systems," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(3), pages 542-553, April.
    3. Kimmo Soramaki & Morten L. Bech & Jeffrey Arnold & Robert J. Glass & Walter Beyeler, 2006. "The topology of interbank payment flows," Staff Reports, Federal Reserve Bank of New York 243, Federal Reserve Bank of New York.
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