How do different models of foreign exchange settlement influence the risks and benefits of global liquidity management?
AbstractLarge, international banking groups have sought to centralise their cross-currency liquidity management: liquidity shortages in one currency are financed using liquidity surpluses in another currency. The nature of risks to financial stability emerging from global liquidity management depends on how these foreign exchange transactions settle. I analyse these risks in a game of asymmetric information. The main result is that the transition from local to global liquidity management, and better co-ordination in settlement of foreign exchange transactions, have two effects. On the one hand, the likelihood rises that payments are delayed beyond their due date. On the other hand, solvency shocks are less likely to be passed on to other banks. The main assumption is that lending between subsidiaries of the same banking group takes place under symmetric information, while external interbank market loans are extended under asymmetric information. More co-ordinated settlement increases the exposure of the intragroup lender relative to the interbank lender and leads to more informed lending.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Bank of England in its series Bank of England working papers with number 374.
Length: 58 pages
Date of creation: 24 Aug 2009
Date of revision:
Contact details of provider:
Postal: Publications Group Bank of England Threadneedle Street London EC2R 8AH
Phone: +44 (0)171 601 4030
Fax: +44 (0)171 601 5196
Web page: http://www.bankofengland.co.uk/
More information through EDIRC
Liquidity risk; foreign exchange settlement;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
- G20 - Financial Economics - - Financial Institutions and Services - - - General
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-09-05 (All new papers)
- NEP-CBA-2009-09-05 (Central Banking)
- NEP-CTA-2009-09-05 (Contract Theory & Applications)
- NEP-IFN-2009-09-05 (International Finance)
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.:
- Tapking, Jens, 2003.
"Multiple equilibrium overnight rates in a dynamic interbank market game,"
Discussion Paper Series 1: Economic Studies
2003,04, Deutsche Bundesbank, Research Centre.
- Tapking, Jens, 2006. "Multiple equilibrium overnight rates in a dynamic interbank market game," Games and Economic Behavior, Elsevier, vol. 56(2), pages 350-370, August.
- Jens Tapking, 2004. "Multiple equilibrium overnight rates in a dynamic interbank market game," Finance 0409042, EconWPA.
- Jens Tapking, 2004. "Multiple equilibrium overnight rates in a dynamic interbank market game," Finance 0409018, EconWPA.
- Gary Gorton & Lixin Huang, 2002.
"Liquidity, Efficiency and Bank Bailouts,"
Center for Financial Institutions Working Papers
02-33, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Mallick, Indrajit, 2004. "Inefficiency of bilateral bargaining in interbank markets," International Review of Economics & Finance, Elsevier, vol. 13(1), pages 43-55.
- David R. Skeie, 2004. "Money and Modern Bank Runs," 2004 Meeting Papers 785, Society for Economic Dynamics.
- Fujiki, Hiroshi, 2006. "Institutions of Foreign Exchange Settlement in a Two-Country Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 697-719, April.
- Christian Ewerhart & Nuno Cassola & Steen Ejerskov & Natacha Valla, .
"Liquidity, Information, and the Overnight Rate,"
IEW - Working Papers
186, Institute for Empirical Research in Economics - University of Zurich.
- Foote, Elizabeth, 2014. "Information asymmetries and spillover risk in settlement systems," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 179-190.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Publications Team).
If references are entirely missing, you can add them using this form.