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A study of competing designs for a liquidity-saving mechanism

  • Martin, Antoine
  • McAndrews, James

We study two designs for a liquidity-saving mechanism (LSM), a queuing arrangement used with an interbank settlement system. With a balance-reactive LSM, banks can set a balance threshold below which payments are not released from the queue, an action not possible with a receipt-reactive LSM. Payments that are costly to delay are settled earlier with a receipt reactive LSM. Payments that are not costly to delay may be queued with a balance reactive LSM but are always delayed with a receipt reactive LSM. We show that either system can provide higher welfare.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 34 (2010)
Issue (Month): 8 (August)
Pages: 1818-1826

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Handle: RePEc:eee:jbfina:v:34:y:2010:i:8:p:1818-1826
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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  13. Matthew Willison, 2005. "Real-Time Gross Settlement and hybrid payment systems: a comparison," Bank of England working papers 252, Bank of England.
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  18. Angelini, Paolo, 2000. "Erratum [Are Banks Risk Averse? Intraday Timing of Operations in the Interbank Market]," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 442, August.
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