A tale of the water-supplying plumber: intraday liquidity provision in payment systems
AbstractThis paper provides an overview of the literature on intraday credit in payment systems to date and explores the dilemma central banks face when deciding on their intraday credit policies. On the one hand, any strategy in which the costs of liquidity are not fully borne by payment system participants can be expected to yield an inefficient outcome . Participants would consume more credit than optimal and, due to moral hazard, central banks would be faced with larger amounts at risk and a greater risk of default than would otherwise be the case. On the other hand, a strategy making intraday liquidity expensive increases the risk of payment delays and payment system gridlocks, due to participants limiting their intraday borrowings and delaying the sending of payments, which can hamper the well functioning of the payment system. This could further influence the allocation of real resources, as achieving economic efficiency requires intraday credit to be provided without cost, even accounting for default risk and moral hazard. Recent developments in payment system design, which have improved the turnover ratio of reserves, have reduced the stringency of the dilemma in a number of countries.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 099.
Date of creation: May 2006
Date of revision:
large-value payment system; intraday credit; liquidity.;
Find related papers by JEL classification:
- E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-06-17 (All new papers)
- NEP-FIN-2006-06-17 (Finance)
- NEP-FMK-2006-06-17 (Financial Markets)
- NEP-MAC-2006-06-17 (Macroeconomics)
- NEP-MST-2006-06-17 (Market Microstructure)
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- Marc PrÃ¶pper & Iman van Lelyveld & Ronald Heijmans, 2008. "Towards a Network Description of Interbank Payment Flows," DNB Working Papers 177, Netherlands Central Bank, Research Department.
- Ronald Heijmans, 2009. "Simulations in the Dutch interbank payment system: A sensitivity analysis," DNB Working Papers 199, Netherlands Central Bank, Research Department.
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