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Recent evolution of large-value payment systems : balancing liquidity and risk


  • Antoine Martin


Large-value payment systems have evolved rapidly in the last 20 years, continually striking a balance between providing liquidity and keeping settlement risk under control. Changes to the design or to the risk management policies of such systems were needed, in part, due to the growth in the value of transactions on these systems. For example, in the United States the value of transactions on Fedwire, the Federal Reserve’s large-value payment system, increased from about 50 times GDP in 1989 to over 62 times GDP in 2003. This value exceeded $704 trillion in 2003. This growth raised concerns that the settlement failure of a large institution could pose severe economic consequences. The disruption in settlements after September 11, 2001, brought new focus to questions such as: How reliable are the payment systems? How should liquidity be provided to system participants? And how can central banks protect themselves from excessive risk? Martin considers the evolution of large-value payment systems in light of the trade-off between providing liquidity and limiting settlement risk. First, he provides some background on large-value payment systems and discusses the trade-off between providing liquidity and controlling settlement risk. Second, he describes the recent evolution of payment systems and explains how this evolution was spurred by increasing concerns about settlement failure, particularly in the EU, the United States, and Canada. Third, he explains some of the differences between three of the major large-value payment systems. Finally, he describes how technological progress and faster computers are allowing new systems to combine the best features of delayed net settlement and real-time gross settlement systems. These systems could offer a better trade-off between liquidity and risk.

Suggested Citation

  • Antoine Martin, 2005. "Recent evolution of large-value payment systems : balancing liquidity and risk," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 33-57.
  • Handle: RePEc:fip:fedker:y:2005:i:qi:p:33-57:n:v.90no.1

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    Cited by:

    1. Jean-Marc Figuet, 2009. "La mise en place de TARGET2 : un élément de la nouvelle architecture financière de l’économie européenne," Revue d'Économie Financière, Programme National Persée, vol. 94(1), pages 329-338.
    2. Julio J. Rotemberg, 2008. "Liquidity Needs in Economies with Interconnected Financial Obligations," NBER Working Papers 14222, National Bureau of Economic Research, Inc.
    3. Gara M. Afonso & Hyun Song Shin, 2008. "Systemic risk and liquidity in payment systems," Staff Reports 352, Federal Reserve Bank of New York.
    4. Neville Arjani, 2006. "Examining the Trade-Off between Settlement Delay and Intraday Liquidity in Canada's LVTS: A Simulation Approach," Staff Working Papers 06-20, Bank of Canada.
    5. Maddaloni, Giuseppe, 2015. "Liquidity risk and policy options," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 514-527.

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