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Liquidity costs and tiering in large-value payment systems

  • Adams, Mark

    ()

    (Bank of England)

  • Galbiati, Marco

    ()

    (Bank of England)

  • Giansante, Simone

    ()

    (CCFEA, University of Essex)

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.

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Paper provided by Bank of England in its series Bank of England working papers with number 399.

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Length: 22 pages
Date of creation: 29 Jul 2010
Date of revision:
Handle: RePEc:boe:boeewp:0399
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  1. Becher, Christopher & Millard, Stephen & Soramäki, Kimmo, 2008. "The network topology of CHAPS Sterling," Bank of England working papers 355, Bank of England.
  2. 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.
  3. James Chapman & Jonathan Chiu & Miguel Molico, 2008. "A Model of Tiered Settlement Networks," Working Papers 08-12, Bank of Canada.
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