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Payment system settlement and bank incentives

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  • Charles M. Kahn
  • William Roberds

Abstract

In this paper we consider the relative merits of net versus gross settlement of interbank payments. Net settlement economizes on the costs of holding non-interest-bearing reserves but increases moral hazard problems. The \"put option\" value of default under net settlement can also distort banks' investment incentives. ; Absent these distortions, net settlement dominates gross, although the optimal net settlement scheme may involve a positive probability of default. Net settlement becomes more attractive relative to gross settlement if bank assets have to be liquidated at less than book value.

Suggested Citation

  • Charles M. Kahn & William Roberds, 1996. "Payment system settlement and bank incentives," FRB Atlanta Working Paper 96-10, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:96-10
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    References listed on IDEAS

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    4. Edward J. Green, 1999. "Money and debt in the structure of payments," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 23(Spr), pages 13-29.
    5. Charles M. Kahn & William Roberds, 1998. "On the role of bank coalitions in the provision of liquidity," Proceedings 590, Federal Reserve Bank of Chicago.
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    7. Rochet, Jean-Charles & Tirole, Jean, 1996. "Interbank Lending and Systemic Risk," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 733-762, November.
    8. Caballero, Ricardo J., 1999. "Aggregate investment," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 12, pages 813-862, Elsevier.
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    More about this item

    Keywords

    Financial institutions; Financial services industry; Payment systems;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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