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Sharing the risk of settlement failure

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  • Hiroshi Fujiki
  • Edward J. Green
  • Akira Yamazaki

Abstract

Two policies toward payments-system risk are common, but superficially appear to be contradictory. One policy is to restrict the exposure to risk generated by one participant to other participants who are, by one measure or another, directly concerned with the risky participant. The other policy is to provide a “safety net,” typically provided by government and funded by taxes collected from all participants and even from non-participants, to share losses due to “systemic risk.” In this paper, we provide a model in which both of these policies can be constituents of an economically efficient regime of payments-risk management.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 594.

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Date of creation: 1999
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Handle: RePEc:fip:fedmwp:594

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Related research

Keywords: Payment systems ; Risk management;

References

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  1. Scott Freeman, 1993. "Clearinghouse banks and banknote over-issue," Research Paper 9326, Federal Reserve Bank of Dallas.
  2. Timberlake, Richard H, Jr, 1984. "The Central Banking Role of Clearinghouse Associations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(1), pages 1-15, February.
  3. Charles Goodhart, 1988. "The Evolution of Central Banks," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262570734, December.
  4. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
  5. Rochet, Jean-Charles & Tirole, Jean, 1996. "Interbank Lending and Systemic Risk," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 733-62, November.
  6. Freeman, Scott, 1996. "The Payments System, Liquidity, and Rediscounting," American Economic Review, American Economic Association, vol. 86(5), pages 1126-38, December.
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Citations

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Cited by:
  1. Charles M. Kahn & William Roberds, 2002. "Payments settlement under limited enforcement: Private versus public systems," Working Paper 2002-33, Federal Reserve Bank of Atlanta.
  2. Lagunoff, Roger & Schreft, Stacey L., 2001. "A Model of Financial Fragility," Journal of Economic Theory, Elsevier, vol. 99(1-2), pages 220-264, July.
  3. Stephen Williamson, 2000. "The Research Agenda: Payment Systems and Private Money," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 2(1), November.
  4. Koeppl, Thorsten & Monnet, Cyril & Temzelides, Ted, 2012. "Optimal clearing arrangements for financial trades," Journal of Financial Economics, Elsevier, vol. 103(1), pages 189-203.
  5. Nilssen,T., 2000. "Risk externalities in a payments oligopoly," Memorandum 10/2000, Oslo University, Department of Economics.
  6. Thorsten Koeppl & Cyril Monnet & Ted Temzelides, 2005. "Mechanism Design and Payments," 2005 Meeting Papers 11, Society for Economic Dynamics.
  7. Thor Koeppl & Cyril Monnet & Ted Temzelides, 2007. "Payments and Mechanism Design," Working Papers 1124, Queen's University, Department of Economics.
  8. Yamazaki, Akira, 1999. "Efficiency of Stochastic Transfers in a Directed Graph," Discussion Papers 1998-12, Graduate School of Economics, Hitotsubashi University.
  9. Fujiki, Hiroshi & Green, Edward J. & Yamazaki, Akira, 2008. "Incentive efficient risk sharing in a settlement mechanism," Journal of Economic Theory, Elsevier, vol. 142(1), pages 178-195, September.
  10. Franklin Allen & Douglas Gale, 1998. "Financial Contagion Journal of Political Economy," Center for Financial Institutions Working Papers 98-31, Wharton School Center for Financial Institutions, University of Pennsylvania.
  11. Franklin Allen & Douglas Gale, 2000. "Financial Contagion," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 1-33, February.
  12. Thorsten Koeppl & Cyril Monnet & Ted Temzelides, 2007. "A dynamic model of the payment system," Working Papers 07-22, Federal Reserve Bank of Philadelphia.

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