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Intraday liquidity needs in a modern interbank payment system : A simulation approach

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  • Koponen, Risto
  • Soramäki, Kimmo

Abstract

In this study three topics in particular are analysed.First, the adequacy of intraday credit limits in the existing and planned Finnish interbank funds transfers systems are studied.Secondly, the efficiency of two actual and two hypothetical payment settlement systems is analysed and, thirdly, the effects of optimization features such as queuing, payment splitting and netting of queued transfers are examined. The data used in the study consist of four days of actual payment data provided by the major banks operating in Finland and 100 days of generated data, where the order and number of daily payments is varied.The study is based on results generated by a payment systems simulator that was developed at the Bank of Finland.The simulator is capable of simulating a wide variety of hypothetical settlement and banking structures as well as various optimization features. The results show that the existing intraday credit limits of the Finnish banks will be sufficient in the settlement system to be used in Stage Three of Economic and Monetary Union.However, some queuing of payments is expected to take place if liquidity is not increased.Systems employing more real-time gross settlement were found to be more efficient in terms of speed of settlement and usage of liquidity per value of payments settled.An RTGS system operating with the same liquidity as an end-of-day net settlement system results in substantially faster settlement of payments. Optimization features enhanced the operation of the system significantly.Splitting of payments enhanced the circulation of liquidity in the system and prevented the formation of gridlocks, thus reducing settlement delay substantially.The main effect of the netting of queued transfers was that it solved gridlock situations during the day and thereby reduced settlement delay. Keywords: payment systems, clearing/settlement, liquidity, simulation, optimization methods

Suggested Citation

  • Koponen, Risto & Soramäki, Kimmo, 1998. "Intraday liquidity needs in a modern interbank payment system : A simulation approach," Scientific Monographs, Bank of Finland, number 1998_014.
  • Handle: RePEc:bof:bofism:1998_014
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    References listed on IDEAS

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    1. Leinonen, Harry, 1998. "Interbank funds transfer systems : Liquidity needs, counterparty risks and collateral," Research Discussion Papers 16/1998, Bank of Finland.
    2. Craig Furfine & Jeff Stehm, 1997. "Analyzing alternative intraday credit policies in real-time gross settlement systems," Finance and Economics Discussion Series 1997-40, Board of Governors of the Federal Reserve System (US), revised 1997.
    3. Calomiris, Charles W & Kahn, Charles M, 1996. "The Efficiency of Self-Regulated Payments Systems: Learning from the Suffolk System," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 766-797, November.
    4. Angelini, P. & Giannini, C., 1993. "On the Economics of Interbank Payment Systems," Papers 193, Banca Italia - Servizio di Studi.
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    Cited by:

    1. Iori, G. & Deissenberg, C., 2008. "An Analysis of Settlement Risk Contagion in Alternative Securities Settlement Architecture," Working Papers 08/03, Department of Economics, City University London.
    2. Kimmo Soramaki & James J. McAndrews & Kurt Johnson, 2004. "Economizing on liquidity with deferred settlement mechanisms," Economic Policy Review, Federal Reserve Bank of New York, issue dec, pages 51-72.
    3. Michele Manna & Carmela Iazzetta, 2009. "The topology of the interbank market: developments in Italy since 1990," Temi di discussione (Economic working papers) 711, Bank of Italy, Economic Research and International Relations Area.
    4. A. Larionov V. & E. Salina S. & А. Ларионов В. & Е. Салина С., 2019. "Регулирование и оценка рисков деятельности платежных систем // Regulation and Risk Assessment of Payment Systems," Управленческие науки // Management Science, ФГОБУВО Финансовый университет при Правительстве Российской Федерации // Financial University under The Government of Russian Federation, vol. 9(3), pages 40-55.
    5. Freddy Cepeda L. & Fabio Ortega C., 2015. "A dynamic approach to intraday liquidity needs," BORRADORES DE ECONOMIA 012686, BANCO DE LA REPÚBLICA.
    6. Leinonen, Harry & Soramäki, Kimmo, 2003. "Simulating interbank payments and securities settlement mechanism with the BoF-PSS2 simulator," Research Discussion Papers 23/2003, Bank of Finland.

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