Risk and concentration in payment and securities settlement systems
Large value payment and securities settlement systems are important components of an economy's financial system. Many such systems are operated by central banks and are liquidity intensive. Central banks often provide inexpensive liquidity to facilitate settlement. This leads to a number of policy questions about the provision of such liquidity. To answer these questions, central banks need to understand what factors influence the timing of settlement. This paper offers a model to better understand intraday patterns of settlement and identifies three factors that influence the timing of settlement: the cost of intraday liquidity, a participant's exposure to settlement risk, and system design. Incorporating all three factors enables our model to explain a number of stylized facts concerning behavior within the Federal Reserve's Fedwire fund and securities systems around a major policy change. In particular, the model captures the different responses of the two systems in both the pattern of settlement and the use of intraday liquidity. The results map out how policy interacts with participants' incentives to influence the use of intraday liquidity and the resultant credit exposure of a central bank. The model, therefore, can inform decision-making at central banks.
|Date of creation:||2007|
|Date of revision:|
|Contact details of provider:|| Postal: 20th Street and Constitution Avenue, NW, Washington, DC 20551|
Web page: http://www.federalreserve.gov/
More information through EDIRC
|Order Information:||Web: http://www.federalreserve.gov/pubs/feds/fedsorder.html|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Charles M. Kahn & James J. McAndrews & William Roberds, 1999.
"Settlement risk under gross and net settlement,"
FRB Atlanta Working Paper
99-10, Federal Reserve Bank of Atlanta.
- Peter C.B. Phillips, 1985.
"Time Series Regression with a Unit Root,"
Cowles Foundation Discussion Papers
740R, Cowles Foundation for Research in Economics, Yale University, revised Feb 1986.
- Heidi Willmann Richards, 1995. "Daylight overdraft fees and the Federal Reserve's payment system risk policy," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Dec, pages 1065-1077.
- Bech, Morten L. & Garratt, Rod, 2001.
"The Intraday Liquidity Management Game,"
University of California at Santa Barbara, Economics Working Paper Series
qt0m6035wg, Department of Economics, UC Santa Barbara.
- Furfine, Craig H, 2003. " Interbank Exposures: Quantifying the Risk of Contagion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(1), pages 111-28, February.
- Stacy Panigay Coleman, 2002. "The evolution of the Federal Reserve's intraday credit policies," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Feb, pages 67-84.
- David C. Mills & Travis D. Nesmith, 2007.
"Risk and concentration in payment and securities settlement systems,"
Finance and Economics Discussion Series
2007-62, Board of Governors of the Federal Reserve System (U.S.).
- Mills Jr., David C. & Nesmith, Travis D., 2008. "Risk and concentration in payment and securities settlement systems," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 542-553, April.
- Green, Edward-J, 1997.
"Money and Debt in the Structure of Payments,"
Monetary and Economic Studies,
Institute for Monetary and Economic Studies, Bank of Japan, vol. 15(1), pages 63-87, May.
- Angelini, P. & Maresca, G. & Russo, D., 1996. "Systemic risk in the netting system," Journal of Banking & Finance, Elsevier, vol. 20(5), pages 853-868, June.
When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:2007-62. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marlene Vikor)
If references are entirely missing, you can add them using this form.