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Bank behaviour and risks in CHAPS following the collapse of Lehman Brothers

Author

Listed:
  • Benos, Evangelos

    (Bank of England)

  • Garratt, Rodney

    (University of California at Santa Barbara)

  • zimmerman, Peter

    (Bank of England)

Abstract

We use payments data for the period 2006-09 to study the impact of the global financial crisis on payment patterns in CHAPS, the United Kingdom’s large-value wholesale payments system. CHAPS functioned smoothly throughout the crisis and all CHAPS settlement banks continued to meet their payment obligations. However, the data show that in the two months following the Lehman Brothers failure, banks did, on average, make payments at a slower pace than before the failure. Our analysis suggests this was partly explained by concerns about counterparty default risk as well as system-wide risk. The ratio of payments made to liquidity used was 30% lower in the period from 15 September 2008 to 30 September 2009 than in the period preceding the default of Lehman Brothers. This was due initially to payment delay, but later was due to banks making more payments with their own liquidity, probably because quantitative easing increased the amount of reserves in the system. To assess the economic significance of the observed delays in the value of payments settled, we develop risk indicators, based on Markov models, to quantify the theoretical liquidity impact of delays during an operational outage. We find that payment delays in the months following the failure of Lehman Brothers led to a statistically significant but economically modest increase in these risk measures.

Suggested Citation

  • Benos, Evangelos & Garratt, Rodney & zimmerman, Peter, 2012. "Bank behaviour and risks in CHAPS following the collapse of Lehman Brothers," Bank of England working papers 451, Bank of England.
  • Handle: RePEc:boe:boeewp:0451
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    References listed on IDEAS

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    1. Olivier Armantier & Jeffrey Arnold & James J. McAndrews, 2008. "Changes in the timing distribution of Fedwire funds transfers," Economic Policy Review, Federal Reserve Bank of New York, vol. 14(Sep), pages 83-112.
    2. Wetherilt, Anne & Zimmerman, Peter & Soramaki, Kimmo, 2010. "The sterling unsecured loan market during 2006-08: insights from network theory," Bank of England working papers 398, Bank of England.
    3. Merrouche, Ouarda & Schanz, Jochen, 2010. "Banks' intraday liquidity management during operational outages: Theory and evidence from the UK payment system," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 314-323, February.
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    Cited by:

    1. Evangelos Benos & Rodney J. Garratt & Peter Zimmerman, 2014. "The Role of Counterparty Risk in CHAPS Following the Collapse of Lehman Brothers," International Journal of Central Banking, International Journal of Central Banking, vol. 10(4), pages 143-172, December.
    2. Denbee, Edward & Garratt, Rodney & Zimmerman, Peter, 2014. "Variations in liquidity provision in real-time payment systems," Bank of England working papers 513, Bank of England.
    3. 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.
    4. 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.
    5. Neville Arjani & Ronald Heijmans, 2020. "Is there anybody out there? Detecting operational outages from LVTS transaction data," DNB Working Papers 683, Netherlands Central Bank, Research Department.
    6. B. Craig & D. Salakhova & M. Saldias, 2018. "Payments delay: propagation and punishment," Working papers 671, Banque de France.
    7. Foote, Elizabeth, 2014. "Information asymmetries and spillover risk in settlement systems," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 179-190.
    8. Edward Denbee & Christian Julliard & Ye Li & Kathy Yuan, 2014. "Network Risk and Key Players: A Structural Analysis of Interbank Liquidity," FMG Discussion Papers dp734, Financial Markets Group.

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    More about this item

    Keywords

    Payments; Intraday liquidity; Credit default swap; Operational outage; Insurance;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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