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Emergence of networks in large value payment systems (LVPSs)

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  • Marco Galbiati

    ()

  • Simone Giansante

    ()

Abstract

This paper develops and simulates a model of emergence of networks in an interbank, RTGS payment system. A number of banks, faced with random streams of payment orders, choose whether to link directly to the payment system, or to use a correspondent bank. Settling payments directly via the system imposes liquidity costs, which depend on the maximum liquidity overdraft incurred during the day. On the other hand, using a correspondent entails paying a flat fee, charged by the correspondent to recoup liquidity costs and to extract a profit. We specify a protocol whereby banks sequentially choose whether to link directly to the system or to become clients of other banks, thus generating a client-correspondent network. We calibrate our model on real data on the UK payment system, and we compare the networks it produces with i) the true client-correspondent network, ii) the outcomes of two ‘dummy' benchmark models. The model is found to outperform the benchmarks. Its predicted networks reproduce some key features of the real UK network.

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Bibliographic Info

Paper provided by Department of Economic Policy, Finance and Development (DEPFID), University of Siena in its series Department of Economic Policy, Finance and Development (DEPFID) University of Siena with number 0110.

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Date of creation: Jan 2010
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Handle: RePEc:usi:depfid:0110

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Related research

Keywords: RTGS; network formation; tiering; correspondent bank; Nash bargaining.;

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Cited by:
  1. Sheri Markose & Simone Giansante & Mateusz Gatkowski & Ali Rais Shaghaghi, 2010. "Too Interconnected To Fail: Financial Contagion and Systemic Risk In Network Model of CDS and Other Credit Enhancement Obligations of US Banks," Working Papers 033, COMISEF.
  2. Ben R. Craig & Goetz von Peter, 2009. "Interbank tiering and money center banks," Working Paper 0912, Federal Reserve Bank of Cleveland.
  3. Galbiati, Marco & Soramaki, Kimmo, 2008. "An agent-based model of payment systems," Bank of England working papers 352, Bank of England.
  4. Markose, Sheri & Giansante, Simone & Shaghaghi, Ali Rais, 2012. "‘Too interconnected to fail’ financial network of US CDS market: Topological fragility and systemic risk," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 627-646.
  5. Galbiati, Marco & Soramäki, Kimmo, 2012. "Clearing networks," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 609-626.
  6. Sheri M. Markose, 2012. "Systemic Risk from Global Financial Derivatives: A Network Analysis of Contagion and Its Mitigation with Super-Spreader Tax," IMF Working Papers 12/282, International Monetary Fund.

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