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Economizing on liquidity with deferred settlement mechanisms

  • Kurt Johnson
  • James J. McAndrews
  • Kimmo Soramaki

Credit extensions to banks using the Fedwire Funds Service-the Federal Reserve's real-time gross settlement (RTGS) payments system-can reach intraday peaks as high as $86 billion. This article evaluates the effectiveness of alternative methods of settling Fedwire payments in reducing intraday credit extensions. The authors simulate three deferred settlement mechanisms that complement RTGS systems: one-hour netting, six-hour netting, and a mechanism called a receipt-reactive gross settlement (RRGS) system. Their results suggest that in conjunction with RTGS systems, the RRGS mechanism could significantly reduce daylight credit extensions while modestly delaying the average time of payment settlement. Moreover, certain features of RRGS systems may encourage banks to submit payments earlier in the day. Further research on RRGS systems may shed light on whether they could prove to be a true liquidity-saving complement to real-time gross settlement systems.

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Article provided by Federal Reserve Bank of New York in its journal Economic Policy Review.

Volume (Year): (2004)
Issue (Month): Dec ()
Pages: 51-72

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Handle: RePEc:fip:fednep:y:2004:i:dec:p:51-72:n:v.10no.3
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  1. James 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.
  2. Bech, Morten L. & Garratt, Rod, 2001. "The Intraday Liquidity Management Game," University of California at Santa Barbara, Economics Working Paper Series qt0m6035wg, Department of Economics, UC Santa Barbara.
  3. Angelini, Paolo, 1998. "An analysis of competitive externalities in gross settlement systems," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 1-18, January.
  4. William Roberds, 1993. "The rise of electronic payments networks and the future role of the Fed with regard to payment finality," Economic Review, Federal Reserve Bank of Atlanta, issue Mar, pages 1-22.
  5. Bech , Morten L. & Soramäki, Kimmo, 2001. "Gridlock Resolution in Interbank Payment Systems," Research Discussion Papers 9/2001, Bank of Finland.
  6. Leinonen, Harry & Soramäki, Kimmo, 1999. "Optimizing Liquidity Usage and Settlement Speed in Payment Systems," Research Discussion Papers 16/1999, Bank of Finland.
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