How do different models of foreign exchange settlement influence the risks and benefits of global liquidity management?
Large, international banking groups have sought to centralise their cross-currency liquidity management: liquidity shortages in one currency are financed using liquidity surpluses in another currency. The nature of risks to financial stability emerging from global liquidity management depends on how these foreign exchange transactions settle. I analyse these risks in a game of asymmetric information. The main result is that the transition from local to global liquidity management, and better co-ordination in settlement of foreign exchange transactions, have two effects. On the one hand, the likelihood rises that payments are delayed beyond their due date. On the other hand, solvency shocks are less likely to be passed on to other banks. The main assumption is that lending between subsidiaries of the same banking group takes place under symmetric information, while external interbank market loans are extended under asymmetric information. More co-ordinated settlement increases the exposure of the intragroup lender relative to the interbank lender and leads to more informed lending.
|Date of creation:||24 Aug 2009|
|Contact details of provider:|| Postal: Bank of England, Threadneedle Street, London, EC2R 8AH|
Phone: +44 (0)171 601 4030
Fax: +44 (0)171 601 5196
Web page: http://www.bankofengland.co.uk/
More information through EDIRC
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.:
- David R. Skeie, 2004. "Money and Modern Bank Runs," 2004 Meeting Papers 785, Society for Economic Dynamics.
- Fujiki, Hiroshi, 2006. "Institutions of Foreign Exchange Settlement in a Two-Country Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 697-719, April.
- Gary Gorton & Lixin Huang, 2004.
"Liquidity, Efficiency, and Bank Bailouts,"
American Economic Review,
American Economic Association, vol. 94(3), pages 455-483, June.
- Gary Gorton & Lixin Huang, 2002. "Liquidity, Efficiency and Bank Bailouts," Center for Financial Institutions Working Papers 02-33, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Gary Gorton & Lixin Huang, 2002. "Liquidity, Efficiency and Bank Bailouts," NBER Working Papers 9158, National Bureau of Economic Research, Inc.
- Tapking, Jens, 2006. "Multiple equilibrium overnight rates in a dynamic interbank market game," Games and Economic Behavior, Elsevier, vol. 56(2), pages 350-370, August.
- Tapking, Jens, 2003. "Multiple equilibrium overnight rates in a dynamic interbank market game," Discussion Paper Series 1: Economic Studies 2003,04, Deutsche Bundesbank, Research Centre.
- Jens Tapking, 2004. "Multiple equilibrium overnight rates in a dynamic interbank market game," Finance 0409018, EconWPA.
- Jens Tapking, 2004. "Multiple equilibrium overnight rates in a dynamic interbank market game," Finance 0409042, EconWPA.
- Cassola, Nuno & Ejerskov, Steen & Ewerhart, Christian & Valla, Natacha, 2004. "Liquidity, information, and the overnight rate," Working Paper Series 378, European Central Bank.
- Mallick, Indrajit, 2004. "Inefficiency of bilateral bargaining in interbank markets," International Review of Economics & Finance, Elsevier, vol. 13(1), pages 43-55. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:boe:boeewp:0374. 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: (Digital Media Team)
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.