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Credit Risk and Collateral Demand in a Retail Payment System

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  • Héctor Pérez Saiz
  • Gabriel Xerri

Abstract

The recent financial crisis has led to the development of new regulations to control risk in designated payment systems, and the implementation of new credit risk management standards is one of the key issues. In this paper, we study various credit risk management schemes for the Canadian retail payment system (ACSS) that are designed to cover the exposure of a defaulting member. We consider schemes that use a collateral pool calculated using a rolling time window. Our simulations show that the size of the window has a very significant effect on the average level of collateral and its variability day to day, creating an interesting trade-off. Collateral levels and variability may be important for ACSS participants because they could affect the opportunity costs of pledging collateral, and also the costs of managing it over time. Our results contribute to understanding the practical implementation of risk management schemes in the current and future generations of payment systems in Canada.

Suggested Citation

  • Héctor Pérez Saiz & Gabriel Xerri, 2016. "Credit Risk and Collateral Demand in a Retail Payment System," Discussion Papers 16-16, Bank of Canada.
  • Handle: RePEc:bca:bocadp:16-16
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    References listed on IDEAS

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    4. James Chapman & Jonathan Chiu & Sajjad Jafri & Héctor Pérez Saiz, 2015. "Public Policy Objectives and the Next Generation of CPA Systems: An Analytical Framework," Discussion Papers 15-6, Bank of Canada.
    5. Jason Allen & Ali Hortaçsu & Jakub Kastl, 2011. "Analyzing Default Risk and Liquidity Demand during a Financial Crisis: The Case of Canada," Staff Working Papers 11-17, Bank of Canada.
    6. Kim McPhail & Anastasia Vakos, 2003. "Excess Collateral in the LVTS: How Much is Too Much?," Staff Working Papers 03-36, Bank of Canada.
    7. Bech, Morten L. & Chapman, James T.E. & Garratt, Rodney J., 2010. "Which bank is the "central" bank?," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 352-363, April.
    8. Radoslav Raykov, 2014. "Optimal Margining and Margin Relief in Centrally Cleared Derivatives Markets," Staff Working Papers 14-29, Bank of Canada.
    9. Daniel Heller & Nicholas Vause, 2012. "Collateral requirements for mandatory central clearing of over-the-counter derivatives," BIS Working Papers 373, Bank for International Settlements.
    10. Berger, Allen N & Hancock, Diana & Marquardt, Jeffrey C, 1996. "A Framework for Analyzing Efficiency, Risks, Costs, and Innovations in the Payments System," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 696-732, November.
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    12. Carlos Arango & Kim Huynh & Ben Fung & Gerald Stuber, 2012. "The Changing Landscape for Retail Payments in Canada and the Implications for the Demand for Cash," Bank of Canada Review, Bank of Canada, vol. 2012(Autumn), pages 31-40.
    13. Manmohan Singh, 2011. "Velocity of Pledged Collateral; Analysis and Implications," IMF Working Papers 2011/256, International Monetary Fund.
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    Cited by:

    1. Héctor Pérez Saiz & Siddharth Untawala & Gabriel Xerri, 2018. "A Calibrated Model of Intraday Settlement," Discussion Papers 18-3, Bank of Canada.
    2. Héctor Pérez Saiz & Blair Williams & Gabriel Xerri, 2018. "Tail Risk in a Retail Payment System: An Extreme-Value Approach," Discussion Papers 18-2, Bank of Canada.

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    More about this item

    Keywords

    Econometric and statistical methods; Financial stability; Payment clearing and settlement systems;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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