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Liquidity costs and tiering in large-value payment systems

Author

Listed:
  • Adams, Mark

    () (Bank of England)

  • Galbiati, Marco

    () (Bank of England)

  • Giansante, Simone

    () (CCFEA, University of Essex)

Abstract

This paper develops and simulates a model of the emergence of networks in an interbank, RTGS payment system. A number of banks, faced with random streams of payment orders, choose whether to link directly to the payment system, or to use a correspondent bank. Settling payments directly on the system imposes liquidity costs which depend on the maximum liquidity overdraft incurred during the day. On the other hand, using a correspondent entails paying a flat fee, charged by the correspondent to recoup liquidity costs and to extract a profit. We specify a protocol whereby one bank in each period can revisit its choice whether to link directly to the system, or to become clients of other banks, thus generating a dynamic client-correspondent network. We simulate this protocol, observing the emergence of different network structures. The liquidity pricing regime chosen by a central bank is found to affect the tiering process and the network structures it produces. A calibration exercise on data from the UK CHAPS system suggests that the model is able to generate realistic predictions, ie a network topology similar to that observed in reality, driven solely by the underlying pattern of payments and the structure of liquidity costs.

Suggested Citation

  • Adams, Mark & Galbiati, Marco & Giansante, Simone, 2010. "Liquidity costs and tiering in large-value payment systems," Bank of England working papers 399, Bank of England.
  • Handle: RePEc:boe:boeewp:0399
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    References listed on IDEAS

    as
    1. Soramäki, Kimmo & Bech, Morten L. & Arnold, Jeffrey & Glass, Robert J. & Beyeler, Walter E., 2007. "The topology of interbank payment flows," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 379(1), pages 317-333.
    2. James Chapman & Jonathan Chiu & Miguel Molico, 2013. "A Model of Tiered Settlement Networks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(2-3), pages 327-347, March.
    3. Becher, Christopher & Millard, Stephen & SoramÃÂäki, Kimmo, 2008. "The network topology of CHAPS Sterling," Bank of England working papers 355, Bank of England.
    4. Alexandra Lai & Nikil Chande & Sean O'Connor, 2006. "Credit in a Tiered Payments System," Staff Working Papers 06-36, Bank of Canada.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Benos, Evangelos & Ferrara, Gerardo & Gurrola-Perez, Pedro, 2017. "The impact of de-tiering in the United Kingdom’s large-value payment system," Bank of England working papers 676, Bank of England.
    2. Spiros Bougheas & Alan P. Kirman, 2014. "Complex Financial Networks and Systemic Risk: A Review," CESifo Working Paper Series 4756, CESifo Group Munich.
    3. Bernardo Bravo-Benitez & Biliana Alexandrova-Kabadjova & Serafin Martinez-Jaramillo, 2016. "Centrality Measurement of the Mexican Large Value Payments System from the Perspective of Multiplex Networks," Computational Economics, Springer;Society for Computational Economics, vol. 47(1), pages 19-47, January.
    4. Robert Arculus & Jennifer Hancock & Greg Moran, 2012. "The Impact of Payment System Design on Tiering Incentives," RBA Research Discussion Papers rdp2012-06, Reserve Bank of Australia.
    5. 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.
    6. Bernardo Bravo-Benitez & Biliana Alexandrova-Kabadjova & Serafin Martinez-Jaramillo, 2016. "Centrality Measurement of the Mexican Large Value Payments System from the Perspective of Multiplex Networks," Computational Economics, Springer;Society for Computational Economics, vol. 47(1), pages 19-47, January.

    More about this item

    Keywords

    Tiering; liquidity cost; large-value payment system; RTGS; network formation;

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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