Journal of Economic Literature Classification Numbers G21, G28.

This paper was presented at the Financial Institutions Center's conference on Performance of Financial Institutions, May 8-10, 1997.">

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Payment System Settlement and Bank Incentives

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Author Info
Charles M. Kahn
William Roberds

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Abstract

In this paper we consider the relative merits of net versus gross settlement of interbank payments. Net settlement economizes on the costs of holding non-interest-bearing reserves, but increases moral hazard problems. The "put option" value of default under net settlement can also distort banks' investment incentives. Absent these distortions, net settlement dominates gross, although the optimal net settlement scheme may involve a positive probability of default. Net settlement becomes more attractive relative to gross settlement if bank assets have to be liquidated at less than book value.

Journal of Economic Literature Classification Numbers G21, G28.

This paper was presented at the Financial Institutions Center's conference on Performance of Financial Institutions, May 8-10, 1997.

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Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 97-32.

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Handle: RePEc:wop:pennin:97-32

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Charles M. Kahn & William Roberds, 1998. "On the role of bank coalitions in the provision of liquidity," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 206-225.
  2. Robert Eisenbeis, 1987. "Eroding market imperfections: implications for financial intermediaries, the payments system, and regulatory reform," Proceedings, Federal Reserve Bank of Kansas City, pages 19-62.
  3. Freeman, Scott, 1996. "Clearinghouse banks and banknote over-issue," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 101-115, August. [Downloadable!] (restricted)
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  4. Bernanke, Ben S, 1990. "Clearing and Settlement during the Crash," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 3(1), pages 133-51. [Downloadable!] (restricted)
  5. Ricardo J. Caballero, 1997. "Aggregate Investment," NBER Working Papers 6264, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. 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. [Downloadable!] (restricted)
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  7. Edward J. Green, 1996. "Money and Debt in the Structure of Payments," Macroeconomics 9609002, EconWPA, revised 09 Sep 1996. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Nilssen,T., 2000. "Risk externalities in a payments oligopoly," Memorandum 10/2000, Oslo University, Department of Economics. [Downloadable!]
  2. Jonathan Chiu & Alexandra Lai, 2007. "Modelling Payments Systems: A Review of the Literature," Working Papers 07-28, Bank of Canada. [Downloadable!]
  3. Leinonen, Harry & Soramäki, Kimmo, 1999. "Optimizing Liquidity Usage and Settlement Speed in Payment Systems," Research Discussion Papers 16/1999, Bank of Finland. [Downloadable!]
  4. Charles M. Kahn & James McAndrews & William Roberds, 1999. "Settlement risk under gross and net settlement," Working Paper 99-10, Federal Reserve Bank of Atlanta. [Downloadable!]
    Other versions:
  5. Leinonen, Harry & Soramäki, Kimmo, 2003. "Simulating interbank payment and securities settlement mechanisms with the BoF-PSS2 simulator," Research Discussion Papers 23/2003, Bank of Finland. [Downloadable!]
  6. Thorsten Koeppl & Cyril Monnet & Ted Temzelides, 2007. "A dynamic model of the payment system," Working Papers 07-22, Federal Reserve Bank of Philadelphia. [Downloadable!]
  7. William R. Emmons, 1997. "Recent developments in wholesale payments systems," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 23-43. [Downloadable!]
  8. Alexandra Lai & Nikil Chande & Sean O'Connor, 2006. "Credit in a Tiered Payments System," Working Papers 06-36, Bank of Canada. [Downloadable!]
    Other versions:
  9. James McAndrews, 1997. "Banking and payment system stability in an electronic money world," Working Papers 97-9, Federal Reserve Bank of Philadelphia. [Downloadable!]
  10. Edward S. Prescott & John A. Weinberg, 2000. "Incentives, communication, and payment instruments," Working Paper 00-11, Federal Reserve Bank of Richmond. [Downloadable!]
    Other versions:
  11. Holthausen, Cornelia & Rochet, Jean Charles, 2003. "Efficient Pricing of Large Value Interbank Payment Systems," CEPR Discussion Papers 3943, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  12. Rodrigo Andrés de Souza Peñaloza, 2003. "On Shadow-Prices of Banks in Real-Time Gross Settlement Systems," Working Papers Series 71, Central Bank of Brazil, Research Department. [Downloadable!]
  13. Jeffrey M. Lacker, 1997. "Clearing, settlement, and monetary policy," Working Paper 97-01, Federal Reserve Bank of Richmond. [Downloadable!]
    Other versions:
  14. Thorsten Koeppl & Cyril Monnet & Ted Temzelides, 2006. "A dynamic model of settlement," Working Paper Series 604, European Central Bank. [Downloadable!]
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  15. Leonardo Bartolini & Spence Hilton & James McAndrews, 2008. "Settlement delays in the money market," Staff Reports 319, Federal Reserve Bank of New York. [Downloadable!]
  16. Charles M. Kahn & William Roberds, 1999. "Real-time gross settlement and the costs of immediacy," Working Paper 98-21, Federal Reserve Bank of Atlanta. [Downloadable!]
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  17. Thor Koeppl & Cyril Monnet & Ted Temzelides, 2007. "Payments and Mechanism Design," Working Papers 1124, Queen's University, Department of Economics. [Downloadable!]
  18. James McAndrews & William Roberds, 1999. "A general equilibrium analysis of check float," Staff Reports 84, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
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