Settlement liquidity and monetary policy implementation—lessons from the financial crisis
The U.S. dollar clearing and settlement system received little attention during the recent financial crisis, mainly because it performed reliably, processing record volumes and values of trades made in stressed financial markets. This article shows how Federal Reserve policy measures aimed at providing liquidity and stability to the financial system during and after the crisis had a major impact on settlement liquidity and thus on the efficiency of clearing and settlement system activity. The measures led to a substantial decrease in daylight overdrafts extended by the Federal Reserve and a quickening of settlement relative to the precrisis period. The decrease in daylight overdrafts reduced credit risk for the Federal Reserve and the earlier time at which payments settled suggests important efficiency gains as well as diminished operational risks. Interestingly, both improvements were the focus of the revisions to the Federal Reserve’s Payment System Risk policy, adopted in late 2008 and implemented in March 2011. To a large extent, the desired outcome had been achieved ahead of the policy change. The authors explain that as the amount of reserves available to the banking system and the opportunity cost of holding such reserves are at the center of any framework for implementing monetary policy, the recent experience offers important lessons for policy going forward.
Volume (Year): (2012)
Issue (Month): Mar ()
|Contact details of provider:|| Postal: |
Web page: http://www.newyorkfed.org/
More information through EDIRC
|Order Information:|| Web: http://www.ny.frb.org/rmaghome/staff_rp/ Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mills Jr., David C. & Nesmith, Travis D., 2008.
"Risk and concentration in payment and securities settlement systems,"
Journal of Monetary Economics,
Elsevier, vol. 55(3), pages 542-553, April.
- 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.).
- Martin, Antoine, 2004.
"Optimal pricing of intraday liquidity,"
Journal of Monetary Economics,
Elsevier, vol. 51(2), pages 401-424, March.
- Morten L. Bech & Bart Hobijn, 2007.
"Technology Diffusion within Central Banking: The Case of Real-Time Gross Settlement,"
International Journal of Central Banking,
International Journal of Central Banking, vol. 3(3), pages 147-181, September.
- Morten L. Bech & Bart Hobijn, 2006. "Technology diffusion within central banking: the case of real-time gross settlement," Staff Reports 260, Federal Reserve Bank of New York.
- Morten L. Bech & Elizabeth Klee, 2009.
"The mechanics of a graceful exit: interest on reserves and segmentation in the federal funds market,"
416, Federal Reserve Bank of New York.
- Bech, Morten L. & Klee, Elizabeth, 2011. "The mechanics of a graceful exit: Interest on reserves and segmentation in the federal funds market," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 415-431.
- Morten L. Bech & Elizabeth Klee, 2010. "The mechanics of a graceful exit: interest on reserves and segmentation in the federal funds market," Finance and Economics Discussion Series 2010-07, Board of Governors of the Federal Reserve System (U.S.).
- Michael J. Fleming, 2001.
"Measuring treasury market liquidity,"
133, Federal Reserve Bank of New York.
- Jamie McAndrews & Antoine Martin, 2007.
"Liquidity saving mechanisms,"
2007 Meeting Papers
165, Society for Economic Dynamics.
- Morten L. Bech & Christine Preisig & Kimmo Soramäki, 2008. "Global trends in large-value payments," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 59-81.
- Todd Keister & Antoine Martin & James McAndrews, 2008. "Divorcing money from monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 41-56.
- Bech , Morten L. & Soramäki, Kimmo, 2001. "Gridlock Resolution in Interbank Payment Systems," Research Discussion Papers 9/2001, Bank of Finland.
- Morten L. Bech & Rodney J. Garratt, 2012.
"Illiquidity in the Interbank Payment System Following Wide‐Scale Disruptions,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 44(5), pages 903-929, 08.
- Morten L. Bech & Rod Garratt, 2006. "Illiquidity in the interbank payment system following wide-scale disruptions," Staff Reports 239, Federal Reserve Bank of New York.
- David Bowman & Etienne Gagnon & Mike Leahy, 2010. "Interest on excess reserves as a monetary policy instrument: the experience of foreign central banks," International Finance Discussion Papers 996, Board of Governors of the Federal Reserve System (U.S.).
- Enghin Atalay & Antoine Martin & James McAndrews, 2010. "Quantifying the benefits of a liquidity-saving mechanism," Staff Reports 447, Federal Reserve Bank of New York.
- Christopher Becher & Marco Galbiati & Merxe Tudela, 2008. "The timing and funding of CHAPS sterling payments," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 113-133.
When requesting a correction, please mention this item's handle: RePEc:fip:fednep:y:2012:i:mar:p:3-20:n:v.18no.1. 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: (Amy Farber)
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 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.