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Bank behaviour and risks in CHAPS following the collapse of Lehman Brothers

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  • Benos, Evangelos

    ()
    (Bank of England)

  • Garratt, Rodney

    ()
    (University of California at Santa Barbara)

  • zimmerman, Peter

    ()
    (Bank of England)

Abstract

We use payments data for the period 2006-09 to study the impact of the global financial crisis on payment patterns in CHAPS, the United Kingdom’s large-value wholesale payments system. CHAPS functioned smoothly throughout the crisis and all CHAPS settlement banks continued to meet their payment obligations. However, the data show that in the two months following the Lehman Brothers failure, banks did, on average, make payments at a slower pace than before the failure. Our analysis suggests this was partly explained by concerns about counterparty default risk as well as system-wide risk. The ratio of payments made to liquidity used was 30% lower in the period from 15 September 2008 to 30 September 2009 than in the period preceding the default of Lehman Brothers. This was due initially to payment delay, but later was due to banks making more payments with their own liquidity, probably because quantitative easing increased the amount of reserves in the system. To assess the economic significance of the observed delays in the value of payments settled, we develop risk indicators, based on Markov models, to quantify the theoretical liquidity impact of delays during an operational outage. We find that payment delays in the months following the failure of Lehman Brothers led to a statistically significant but economically modest increase in these risk measures.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 451.

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Length: 36 pages
Date of creation: 21 Jun 2012
Date of revision:
Handle: RePEc:boe:boeewp:0451

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Keywords: Payments; Intraday liquidity; Credit default swap; Operational outage; Insurance;

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  1. Merrouche, Ouarda & Schanz, Jochen, 2009. "Banks' intraday liquidity management during operational outages: theory and evidence from the UK payment system," Bank of England working papers 370, Bank of England.
  2. Wetherilt, Anne & Zimmerman, Peter & Soramaki, Kimmo, 2010. "The sterling unsecured loan market during 2006-08: insights from network theory," Bank of England working papers 398, Bank of England.
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Cited by:
  1. Foote, Elizabeth, 2014. "Information asymmetries and spillover risk in settlement systems," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 179-190.

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