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A dynamic approach to intraday liquidity needs

Author

Listed:
  • Freddy Cepeda L.

    (Banco de la República de Colombia)

  • Fabio Ortega C.

    (Banco de la República de Colombia)

Abstract

This paper presents a methodology to estimate the intraday liquidity that systemically important entities (SIE) need to fulfill all its obligations in a timely fashion, when a simulated failure-to-pay from its main liquidity supplier by discretionary concepts of payment occurs. Using the Bank of Finland’s simulator and the fund transfer data from Colombian large value payment system, we achieve a dynamic estimation measuring three types of effects (direct, second round and feedback). The results validate the existence of a non-linear relationship between the initial failure-to-pay of a specific institution and extended failures-to-pay to the rest of system. An Intraday Liquidity Sufficiency Index is proposed to quantify the average amount of additional liquidity needed to fulfill timely all SIE’s obligations without generating second-round effects. Our methodology and recommendations contribute to the international discussion on management intraday liquidity risk, to efficiency and security of the payment system, and ultimately to financial stability.

Suggested Citation

  • Freddy Cepeda L. & Fabio Ortega C., 2015. "A dynamic approach to intraday liquidity needs," Borradores de Economia 877, Banco de la Republica de Colombia.
    • Handle: RePEc:bdr:borrec:877
    DOI: 10.32468/be.877
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    References listed on IDEAS

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    1. Kenneth R. French & Martin N. Baily & John Y. Campbell & John H. Cochrane & Douglas W. Diamond & Darrell Duffie & Anil K Kashyap & Frederic S. Mishkin & Raghuram G. Rajan & David S. Scharfstein & Robe, 2010. "The Squam Lake Report: Fixing the Financial System," Economics Books, Princeton University Press, edition 1, number 9261.
    2. 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.
    3. International Monetary Fund, 2013. "Colombia: Financial System Stability Assessment," IMF Staff Country Reports 2013/050, International Monetary Fund.
    4. Ackermann, Josef, 2008. "The subprime crisis and its consequences," Journal of Financial Stability, Elsevier, vol. 4(4), pages 329-337, December.
    5. Alan Ball & Edward Denbee & Mark Manning & Anne Wetherilt, 2011. "Financial Stability Paper No 11: Intraday Liquidity - Risk and Regulation," Bank of England Financial Stability Papers 11, Bank of England.
    6. Carlos León & Clara Machado, 2011. "Designing an expert knowledge-based Systemic Importance Index for financial institutions," Borradores de Economia 669, Banco de la Republica de Colombia.
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    Cited by:

    1. Carlos A. Arango & Freddy H. Cepeda, 2016. "Non-monotonic Tradeoffs of Tiering in a Large Value Payment System," Borradores de Economia 946, Banco de la Republica de Colombia.
    2. Carlos León & Constanza Mart�nez-Ventura & Freddy Cepeda-L�pez, 2019. "Short-Term Liquidity Contagion in the Interbank Market," Revista Cuadernos de Economia, Universidad Nacional de Colombia, FCE, CID, vol. 38(76), pages 51-80.

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    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • 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

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