IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v34y2010i5p934-945.html
   My bibliography  Save this article

Settlement delays in the money market

Author

Listed:
  • Bartolini, Leonardo
  • Hilton, Spence
  • McAndrews, James J.

Abstract

We track 38,000 money market trades from execution to delivery and return, and provide a first empirical analysis of settlement delays in financial markets. In accord with the predictions of recent models of strategic settlement of financial claims, we document a tendency by lenders to delay delivery of loaned funds until the afternoon hours. We find banks to follow a simple strategy to manage the risk of account overdrafts, by delaying settlement of large payments relative to that of small payments. More sophisticated strategies such as increasing delays when own liquid balances are low and when dealing with small trading partners play a marginal role. We find evidence of strategic delay also when returning borrowed funds, although we can explain a smaller fraction of the dispersion in delays in the return than in delivery leg of money market lending.

Suggested Citation

  • Bartolini, Leonardo & Hilton, Spence & McAndrews, James J., 2010. "Settlement delays in the money market," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 934-945, May.
  • Handle: RePEc:eee:jbfina:v:34:y:2010:i:5:p:934-945
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378-4266(09)00284-2
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Olivier Armantier & Jeffrey Arnold & James J. McAndrews, 2008. "Changes in the timing distribution of Fedwire funds transfers," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 83-112.
    2. Kahn, Charles M & Roberds, William, 1998. "Payment System Settlement and Bank Incentives," Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 845-870.
    3. Craig, Ben & Fecht, Falko, 2007. "The eurosystem money market auctions: A banking perspective," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2925-2944, September.
    4. Angelini, Paolo, 1998. "An analysis of competitive externalities in gross settlement systems," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 1-18, January.
    5. Adam B. Ashcraft & Darrell Duffie, 2007. "Systemic Illiquidity in the Federal Funds Market," American Economic Review, American Economic Association, vol. 97(2), pages 221-225, May.
    6. Craig Furfine, 2006. "The Costs and Benefits of Moral Suasion: Evidence from the Rescue of Long-Term Capital Management," The Journal of Business, University of Chicago Press, vol. 79(2), pages 593-622, March.
    7. Bech, Morten L. & Soramäki, Kimmo, 2001. "Gridlock resolution in interbank payment systems," Research Discussion Papers 9/2001, Bank of Finland.
    8. Adam B. Ashcraft & Hoyt Bleakley, 2006. "On the market discipline of informationally opaque firms: evidence from bank borrowers in the federal funds market," Staff Reports 257, Federal Reserve Bank of New York.
    9. Bech, Morten L. & Garratt, Rod, 2003. "The intraday liquidity management game," Journal of Economic Theory, Elsevier, vol. 109(2), pages 198-219, April.
    10. Leonardo Bartolini & Spence Hilton & Alessandro Prati, 2008. "Money Market Integration," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(1), pages 193-213, February.
    11. Bernanke, Ben S, 1990. "Clearing and Settlement during the Crash," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 133-151.
    12. James J. McAndrews & Samira Rajan, 2000. "The timing and funding of Fedwire funds transfers," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 17-32.
    13. Jing Yang & Sheri Markose & Amadeo Alentorn, 2005. "Designing large value payment systems: an agent based approach," Computing in Economics and Finance 2005 396, Society for Computational Economics.
    14. Furfine, Craig H, 2001. "Banks as Monitors of Other Banks: Evidence from the Overnight Federal Funds Market," The Journal of Business, University of Chicago Press, vol. 74(1), pages 33-57, January.
    15. Furfine, Craig H, 2003. " Interbank Exposures: Quantifying the Risk of Contagion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(1), pages 111-128, February.
    16. Demiralp, Selva & Preslopsky, Brian & Whitesell, William, 2006. "Overnight interbank loan markets," Journal of Economics and Business, Elsevier, vol. 58(1), pages 67-83.
    17. Heidi Willmann Richards, 1995. "Daylight overdraft fees and the Federal Reserve's payment system risk policy," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Dec, pages 1065-1077.
    18. Leonardo Bartolini & Svenja Gudell & R. Spence Hilton & Krista B. Schwarz, 2005. "Intraday trading in the overnight federal funds market," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 11(Nov).
    19. Scott Hendry & Nadja Kamhi, 2007. "Uncollateralized Overnight Loans Settled in LVTS," Staff Working Papers 07-11, Bank of Canada.
    20. Kotomin, Vladimir & Smith, Stanley D. & Winters, Drew B., 2008. "Preferred habitat for liquidity in international short-term interest rates," Journal of Banking & Finance, Elsevier, vol. 32(2), pages 240-250, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Thomas Nellen, 2015. "Collateralised liquidity, two-part tariff and settlement coordination," Working Papers 2015-13, Swiss National Bank.
    2. Elizabeth C. Klee, 2011. "The first line of defense: the discount window during the early stages of the financial crisis," Finance and Economics Discussion Series 2011-23, Board of Governors of the Federal Reserve System (U.S.).
    3. Bech, Morten L. & Atalay, Enghin, 2010. "The topology of the federal funds market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(22), pages 5223-5246.
    4. B. Craig & D. Salakhova & M. Saldias, 2018. "Payments delay: propagation and punishment," Working papers 671, Banque de France.
    5. Morten L. Bech & Carl T. Bergstrom & Rod Garratt & Martin Rosvall, 2011. "Mapping change in the federal funds market," Staff Reports 507, Federal Reserve Bank of New York.
    6. Pritsker, Matthew, 2013. "Knightian uncertainty and interbank lending," Journal of Financial Intermediation, Elsevier, vol. 22(1), pages 85-105.
    7. Babus, Ana & Hu, Tai-Wei, 2017. "Endogenous intermediation in over-the-counter markets," Journal of Financial Economics, Elsevier, vol. 125(1), pages 200-215.
    8. Bech, Morten L. & Bergstrom, Carl T. & Rosvall, Martin & Garratt, Rodney J., 2015. "Mapping change in the overnight money market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 424(C), pages 44-51.
    9. Quinn, Stephen & Roberds, William, 2014. "How Amsterdam got fiat money," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 1-12.
    10. Pokutta, Sebastian & Schmaltz, Christian, 2011. "Managing liquidity: Optimal degree of centralization," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 627-638, March.
    11. Maddaloni, Giuseppe, 2015. "Liquidity risk and policy options," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 514-527.
    12. Afonso, Gara M. & Lagos, Ricardo, 2012. "An empirical study of trade dynamics in the interbank market," Staff Reports 550, Federal Reserve Bank of New York, revised 01 Jun 2014.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:34:y:2010:i:5:p:934-945. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/jbf .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.