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Risk and concentration in payment and securities settlement systems

  • Mills Jr., David C.
  • Nesmith, Travis D.

What drives the intraday patterns of settlement in payment and securities settlement systems? Using a model of the strategic interaction of participants in these systems to capture some stylized facts about the Federal Reserve's Fedwire funds and securities systems, this paper identifies three factors that influence a participant's decision on when to send transactions intraday: cost of intraday liquidity, extent of settlement risk, and system design. With these factors, the model can make predictions regarding the impact of policy on the concentration of transactions, amount of intraday overdrafts, central bank credit exposure, costs to system participants, and other risks.

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File URL: http://www.sciencedirect.com/science/article/B6VBW-4RMW9S7-1/1/82334706053568b5e1716407cf427de7
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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 55 (2008)
Issue (Month): 3 (April)
Pages: 542-553

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Handle: RePEc:eee:moneco:v:55:y:2008:i:3:p:542-553
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. Edward J. Green, 1999. "Money and debt in the structure of payments," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 13-29.
  2. Bech, Morten L. & Garratt, Rod, 2003. "The intraday liquidity management game," Journal of Economic Theory, Elsevier, vol. 109(2), pages 198-219, April.
  3. Charles M. Kahn & James McAndrews & William Roberds, 1999. "Settlement risk under gross and net settlement," Working Paper 99-10, Federal Reserve Bank of Atlanta.
  4. Stacy Panigay Coleman, 2002. "The evolution of the Federal Reserve's intraday credit policies," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Feb, pages 67-84.
  5. David C. Mills, Jr. & Travis D. Nesmith, 2007. "Risk and concentration in payment and securities settlement systems," Finance and Economics Discussion Series 2007-62, Board of Governors of the Federal Reserve System (U.S.).
  6. 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.
  7. Furfine, Craig H, 2003. " Interbank Exposures: Quantifying the Risk of Contagion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(1), pages 111-28, February.
  8. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
  9. Angelini, P. & Maresca, G. & Russo, D., 1996. "Systemic risk in the netting system," Journal of Banking & Finance, Elsevier, vol. 20(5), pages 853-868, June.
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