The Impact of Payment System Design on Tiering Incentives
AbstractTiering occurs when an institution does not participate directly in the central payment system but instead settles its payments through an agent. A high level of tiering can be a significant issue for payment system regulators because of the increased credit and concentration risk. This paper explores the impact of payment system design on institutions' incentives to tier using simulation analysis. Some evidence is found to support the hypothesis that the liquidity-saving mechanisms in Australia's real-time gross settlement (RTGS) system – the Reserve Bank Information and Transfer System (RITS) – reduce the liquidity cost of direct participation. This may have contributed to the low level of tiering in RITS relative to RTGS systems in other countries. We find no clear relationship between system design and the size of the substantial two-way exposures tiering creates between clients and their settlement banks. Our data suggest that more tiering would result in only small increases to the level of concentration in RITS.
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Bibliographic InfoPaper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2012-06.
Date of creation: Oct 2012
Date of revision:
Find related papers by JEL classification:
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- 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
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- Adams, Mark & Galbiati, Marco & Giansante, Simone, 2010. "Liquidity costs and tiering in large-value payment systems," Bank of England working papers 399, Bank of England.
- James Chapman & Jonathan Chiu & Miguel Molico, 2008.
"A Model of Tiered Settlement Networks,"
08-12, Bank of Canada.
- Ana Lasaosa & Merxe Tudela, 2008. "Risks and efficiency gains of a tiered structure in large-value payments: a simulation approach," Bank of England working papers 337, Bank of England.
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