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

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  • Matthew Willison
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    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.

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    Bibliographic Info

    Paper provided by Bank of England in its series Bank of England working papers with number 252.

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    Date of creation: Mar 2005
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    Handle: RePEc:boe:boeewp:252

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    1. Leinonen, Harry & Soramäki, Kimmo, 1999. "Optimizing Liquidity Usage and Settlement Speed in Payment Systems," Research Discussion Papers 16/1999, Bank of Finland.
    2. Bech, Morten L. & Garratt, Rod, 2001. "The Intraday Liquidity Management Game," University of California at Santa Barbara, Economics Working Paper Series qt0m6035wg, Department of Economics, UC Santa Barbara.
    3. Angelini, Paolo, 1998. "An analysis of competitive externalities in gross settlement systems," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 1-18, January.
    4. repec:fth:bfdipa:16/99 is not listed on IDEAS
    5. 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.
    6. S. Illeris & G. Akehurst, 2002. "Introduction," The Service Industries Journal, Taylor & Francis Journals, vol. 22(1), pages 1-3, January.
    7. 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. 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.
    2. Martin, Antoine & McAndrews, James, 2008. "Liquidity-saving mechanisms," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 554-567, April.
    3. Antoine Martin & James McAndrews, 2008. "A study of competing designs for a liquidity-saving mechanism," Staff Reports 336, Federal Reserve Bank of New York.
    4. 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.

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