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Contagion and efficiency in gross and net interbank payment systems

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  • Xavier Freixas
  • Bruno Parigi

Abstract

The increased fragility of the banking industry has generated growing concern about the risks associated with the payment systems. Although in most industrial countries different interbank payment systems coexist, little is really known about their propierties in terms of risk and efficiency. We tackle this question by comparing the two main types of payment systems, gross and net, in a framework where uncertainty arises from several sources: the time of consumption, the location of consumption and the return on investment. Payments across locations can be made either by directly transferrring liquidity or by transferring claims against the bank in the other location. The two mechanism are interpreted as the gross and net settlement systems in interbank payments. We characterize the equilibria in the two systems and identify the trade-off in terms of safety and efficiency.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Chicago in its series Proceedings with number 592.

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Length: 247-274
Date of creation: 1998
Date of revision:
Publication status: Published in Conference on Bank Structure and Competition (1998 : 34th) ; Payments systems in the global economy : risks and opportunitie.
Handle: RePEc:fip:fedhpr:592

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Keywords: Payment systems ; Clearinghouses (Banking);

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References

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  1. Gorton, Gary, 1988. "Banking Panics and Business Cycles," Oxford Economic Papers, Oxford University Press, vol. 40(4), pages 751-81, December.
  2. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  3. Greenspan, Alan, 1996. "Remarks on Evolving Payment System Issues," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 28(4), pages 689-95, November.
  4. Hellwig, Martin, 1994. "Liquidity provision, banking, and the allocation of interest rate risk," European Economic Review, Elsevier, Elsevier, vol. 38(7), pages 1363-1389, August.
  5. James McAndrews & William Roberds, 1994. "Banks, payments, and coordination," Working Paper, Federal Reserve Bank of Atlanta 94-14, Federal Reserve Bank of Atlanta.
  6. Kahn, Charles M & Roberds, William, 1998. "Payment System Settlement and Bank Incentives," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 11(4), pages 845-70.
  7. Bhattacharya, Sudipto & Fulghieri, Paolo, 1994. "Uncertain liquidity and interbank contracting," Economics Letters, Elsevier, Elsevier, vol. 44(3), pages 287-294.
  8. Rochet, Jean-Charles & Tirole, Jean, 1996. "Interbank Lending and Systemic Risk," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 28(4), pages 733-62, November.
  9. V.V. Chari & Ravi Jagannathan, 1984. "Banking Panics," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 618, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Jacklin, Charles J & Bhattacharya, Sudipto, 1988. "Distinguishing Panics and Information-Based Bank Runs: Welfare and Policy Implications," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(3), pages 568-92, June.
  11. Angelini, P. & Maresca, G. & Russo, D., 1996. "Systemic risk in the netting system," Journal of Banking & Finance, Elsevier, Elsevier, vol. 20(5), pages 853-868, June.
  12. Angelini, P. & Giannini, C., 1993. "On the Economics of Interbank Payment Systems," Papers, Banca Italia - Servizio di Studi 193, Banca Italia - Servizio di Studi.
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