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The Impact of Payment System Design on Tiering Incentives

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  • Robert Arculus

    (Reserve Bank of Australia)

  • Jennifer Hancock

    (Reserve Bank of Australia)

  • Greg Moran

    (Reserve Bank of Australia)

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    Abstract

    Tiering 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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    File URL: http://www.rba.gov.au/publications/rdp/2012/pdf/rdp2012-06.pdf
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    Bibliographic Info

    Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2012-06.

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    Date of creation: Oct 2012
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    Handle: RePEc:rba:rbardp:rdp2012-06

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    Related research

    Keywords: large-value payment systems; tiering; liquidity; simulation;

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    References

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    1. James Chapman & Jonathan Chiu & Miguel Molico, 2013. "A Model of Tiered Settlement Networks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(2-3), pages 327-347, 03.
    2. 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.
    3. 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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