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Payment System Settlement and Bank Incentives

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  • Kahn, Charles M
  • Roberds, William

Abstract

In this article, we consider the relative merits of net versus gross settlement of interbank payments. Net settlement economizes on the costs of holding non-interest-bearing reserves, but increases moral hazard problems. The 'put option' value of default under net settlement can also distort banks' investment incentives. Absent these distortions, net settlement dominates gross, although the optimal net settlement scheme may involve a positive probability of default. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Suggested Citation

  • Kahn, Charles M & Roberds, William, 1998. "Payment System Settlement and Bank Incentives," The Review of Financial Studies, Society for Financial Studies, vol. 11(4), pages 845-870.
    • Handle: RePEc:oup:rfinst:v:11:y:1998:i:4:p:845-70
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    References listed on IDEAS

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    5. Edward J. Green, 1999. "Money and debt in the structure of payments," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 23(Spr), pages 13-29.
    6. Charles M. Kahn & William Roberds, 1998. "On the role of bank coalitions in the provision of liquidity," Proceedings 590, Federal Reserve Bank of Chicago.
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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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