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System-wide liquidity risk in the United Kingdom’s large-value payment system: an empirical analysis

Author

Listed:
  • Marcelo Perlin

    (Professor Adjunto - Escola de Administração (Federal University of Rio Grande do Sul, Brazil))

  • Jochen Schanz

    (Bank of England)

Abstract

When settling their own liabilities and those of their clients, settlement banks rely on incoming payments to fund a part of their outgoing payments. We investigate their behaviour in CHAPS, the United Kingdom’s large-value payment system. Our estimates suggest that in normal times, banks increase their payment outflows when their liquidity is above target and immediately following the receipt of payments. We use these estimates to determine the robustness of this payment system to two hypothetical behavioural changes. In the first, a single bank stops sending payments, perhaps because of an operational problem. In the second, it pays out exactly what it previously received, relying exclusively on the liquidity provided by other system members. Using the observed uncertainty around our estimated behavioural equations, we derive probabilistic statements about the time at which the bank’s counterparties would run out of liquidity if they followed their estimated normal-time behaviour.

Suggested Citation

  • Marcelo Perlin & Jochen Schanz, 2011. "System-wide liquidity risk in the United Kingdom’s large-value payment system: an empirical analysis," Bank of England working papers 427, Bank of England.
  • Handle: RePEc:boe:boeewp:0427
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    References listed on IDEAS

    as
    1. Anne Wetherilt & Peter Zimmerman & Kimmo Soramaki, 2010. "The sterling unsecured loan market during 2006-08: insights from network theory," Bank of England working papers 398, Bank of England.
    2. David Aikman & Piergiorgio Alessandri & Bruno Eklund & Prasanna Gai & Sujit Kapadia & Elizabeth Martin & Nada Mora & Gabriel Sterne & Matthew Willison, 2011. "Funding Liquidity Risk in a Quantitative Model of Systemic Stability," Central Banking, Analysis, and Economic Policies Book Series, in: Rodrigo Alfaro (ed.),Financial Stability, Monetary Policy, and Central Banking, edition 1, volume 15, chapter 12, pages 371-410, Central Bank of Chile.
    3. Christopher Becher & Marco Galbiati & Merxe Tudela, 2008. "The timing and funding of CHAPS sterling payments," Economic Policy Review, Federal Reserve Bank of New York, vol. 14(Sep), pages 113-133.
    4. Beyeler, Walter E. & Glass, Robert J. & Bech, Morten L. & Soramäki, Kimmo, 2007. "Congestion and cascades in payment systems," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 384(2), pages 693-718.
    5. 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.
    6. Jan Willem van den End, 2010. "Liquidity Stress-Tester: A Model for Stress-testing Banks' Liquidity Risk," CESifo Economic Studies, CESifo, vol. 56(1), pages 38-69, March.
    7. Manning, Mark & Nier, Erlend & Schanz, Jochen (ed.), 2009. "The Economics of Large-value Payments and Settlement: Theory and Policy Issues for Central Banks," OUP Catalogue, Oxford University Press, number 9780199571116, Decembrie.
    8. Christopher Becher & Stephen Millard & Kimmo SoramÃÂäki, 2008. "The network topology of CHAPS Sterling," Bank of England working papers 355, Bank of England.
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    Cited by:

    1. Constanza Martínez & Freddy Cepeda, 2015. "Reaction Functions of the Participants in Colombia’s Large-value Payment System," Borradores de Economia 875, Banco de la Republica de Colombia.
    2. Lana Embree & Varya Taylor, 2015. "Examining Full Collateral Coverage in Canada’s Large Value Transfer System," Staff Working Papers 15-29, Bank of Canada.

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    More about this item

    Keywords

    Payment systems; banks; network models; contagion; systemic risk; liquidity risk;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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