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Real-Time Gross Settlement and hybrid payment systems: a comparison

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  • Matthew Willison

Abstract

This paper contrasts Real-Time Gross Settlement and hybrid payment systems that are based on payment offset, using a two-period, multi-bank model. The comparison is performed according to two criteria: liquidity needs and speed of settlement. We assume that the existence of a payment is common knowledge but that the specific degree of time-criticality of a payment is the private information of the bank sending the payment. Hybrid payment systems are shown to outperform Real-Time Gross Settlement when payments are offset in the first period and when they are offset in both periods. This suggests that in a hybrid system, the offsetting facility should be in operation all day, or, at the very least, for some time after the system opens in the morning. A system in which the offsetting facility was only switched on late in the day would not necessarily be preferred to Real-Time Gross Settlement. These results are shown to be robust to changes in the transparency of the central queue of payments awaiting offset. However, this robustness may not hold with different forms of information asymmetry.

Suggested Citation

  • Matthew Willison, 2005. "Real-Time Gross Settlement and hybrid payment systems: a comparison," Bank of England working papers 252, Bank of England.
    • Handle: RePEc:boe:boeewp:252
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    File URL: http://www.bankofengland.co.uk/research/Documents/workingpapers/2005/WP252.pdf
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    References listed on IDEAS

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    1. repec:zbw:bofrdp:1999_016 is not listed on IDEAS
    2. Angelini, Paolo, 1998. "An analysis of competitive externalities in gross settlement systems," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 1-18, January.
    3. William Roberds, 1993. "The rise of electronic payments networks and the future role of the Fed with regard to payment finality," Economic Review, Federal Reserve Bank of Atlanta, issue Mar, pages 1-22.
    4. Bech, Morten L. & Garratt, Rod, 2003. "The intraday liquidity management game," Journal of Economic Theory, Elsevier, vol. 109(2), pages 198-219, April.
    5. Kobayakawa, Shuji, 1997. "The Comparative Analysis of Settlement Systems," CEPR Discussion Papers 1667, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Martin, Antoine & McAndrews, James, 2008. "Liquidity-saving mechanisms," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 554-567, April.
    2. Leinonen, Harry (ed.), 2009. "Simulation analyses and stress testing of payment networks," Bank of Finland Scientific Monographs, Bank of Finland, volume 0, number sm2009_042.
    3. Marius Jurgilas & Antoine Martin, 2013. "Liquidity-saving mechanisms in collateral-based RTGS payment systems," Annals of Finance, Springer, vol. 9(1), pages 29-60, February.
    4. Ball, Alan & Denbee, Edward & Manning, Mark & Wetherilt, Anne, 2011. "Financial Stability Paper No 11: Intraday Liquidity - Risk and Regulation," Bank of England Financial Stability Papers 11, Bank of England.
    5. Martin, Antoine & McAndrews, James, 2010. "A study of competing designs for a liquidity-saving mechanism," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1818-1826, August.
    6. Norman, Ben, 2010. "Financial Stability Paper No 7: Liquidity Saving in Real-Time Gross Settlement Systems - an Overview," Bank of England Financial Stability Papers 7, Bank of England.
    7. Kahn, Charles M. & Roberds, William, 2009. "Why pay? An introduction to payments economics," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 1-23, January.
    8. 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, vol. 34(2), pages 314-323, February.
    9. Tomohiro Ota, 2016. "Sequential payments and optimal pricing in payment systems," Annals of Finance, Springer, vol. 12(3), pages 441-463, December.
    10. Jing Yang & Sheri Markose & Amadeo Alentorn, 2005. "Designing large value payment systems: an agent based approach," Computing in Economics and Finance 2005 396, Society for Computational Economics.

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