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Designing large value payment systems: An agent-based approach

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  • Markose, Sheri M
  • Alentorn, Amadeo
  • Millard, Stephen
  • Yang, Jing

Abstract

The purpose of this paper is to show how agent-based simulations of payment systems can be used to aid central bankers and payment system operators in thinking about the appropriate design of payment settlement systems to minimise risk and increase their efficiency. Banks, which we model as the 'agents', are capable of a degree of autonomy with which to respond to payment system rules and adopt a strategy that determines how much collateral to post with the central bank at the start of the day (equivalently how much liquidity to borrow intraday from the central bank) and when to send payment orders to the central processor. An interbank payment system with costly liquidity requires banks to solve an intraday cash management problem, minimising their liquidity and delay costs subject to their beliefs about what the other banks are doing. Some preliminary results are given on how banks learn to endogenously determine how much liquidity to post in the interbank liquidity management game.

Suggested Citation

  • Markose, Sheri M & Alentorn, Amadeo & Millard, Stephen & Yang, Jing, 2011. "Designing large value payment systems: An agent-based approach," Economics Discussion Papers 3714, University of Essex, Department of Economics.
    • Handle: RePEc:esx:essedp:3714
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    References listed on IDEAS

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    1. Angelini, Paolo, 1998. "An analysis of competitive externalities in gross settlement systems," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 1-18, January.
    2. Erev, Ido & Roth, Alvin E, 1998. "Predicting How People Play Games: Reinforcement Learning in Experimental Games with Unique, Mixed Strategy Equilibria," American Economic Review, American Economic Association, vol. 88(4), pages 848-881, September.
    3. Matthew Willison, 2005. "Real-Time Gross Settlement and hybrid payment systems: a comparison," Bank of England Staff Working Paper series 252, Bank of England.
    4. Bech, Morten L. & Garratt, Rod, 2003. "The intraday liquidity management game," Journal of Economic Theory, Elsevier, vol. 109(2), pages 198-219, April.
    5. Leinonen, Harry, 2005. "Liquidity, risks and speed in payment and settlement systems : a simulation approach," Scientific Monographs, Bank of Finland, number 2005_031.
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