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Settlement finality as a public good in large-value payment systems

Author

Listed:
  • David Humphrey

    (Florida State Yniversity)

  • Henri Pages

    (Banque de France)

Abstract

Target is a real time gross settlement (RTGS) large value payment network operated by European central banks that eliminates systemic risk. Euro1 is a privately operated delayed net settlement (DNS) network that reduces substantially systemic risk but does not eliminate it. This difference makes RTGS networks more expensive to users even if both networks had the same unit operating costs. This provides an incentive for users to shift payments to the more risky network in normal times and back to Target in times of financial market disruption. The estimated extra cost to a DNS network from posting collateral sufficient to cover all exposures (and eliminate systemic risk) is from 15 to 42 cents per transaction. If full cost recovery on an RTGS system were reduced by this amount, user collateral costs — but not risks — would be equalized between networks. Full collateralization on DNS networks would equalize both user costs and risks.

Suggested Citation

  • David Humphrey & Henri Pages, 2005. "Settlement finality as a public good in large-value payment systems," Public Economics 0509003, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwppe:0509003
    Note: Type of Document - pdf; pages: 18
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/pe/papers/0509/0509003.pdf
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    References listed on IDEAS

    as
    1. Sawaichiro Kamata, 1990. "Managing risk in Japanese interbank payment systems," Economic Review, Federal Reserve Bank of San Francisco, issue Fall, pages 18-32.
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    Cited by:

    1. Jooyong Jun & Eunjung Yeo, 2021. "Central bank digital currency, loan supply, and bank failure risk: a microeconomic approach," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-22, December.
    2. Rzońca, Andrzej & Ciżkowicz, Piotr, 2005. "Non-Keynesian effects of fiscal contraction in new member states," Working Paper Series 519, European Central Bank.
    3. Wandhöfer, Ruth, 2019. "Technology innovation in financial markets : Implications for money, payments and settlement finality," Other publications TiSEM b7d8b24a-dbf4-4f82-b596-3, Tilburg University, School of Economics and Management.

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    2. Hancock, Diana & Humphrey, David B., 1997. "Payment transactions, instruments, and systems: A survey," Journal of Banking & Finance, Elsevier, vol. 21(11-12), pages 1573-1624, December.

    More about this item

    Keywords

    payments; settlement; public good;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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