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Settlement Speed and Financial Stability

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Abstract

This paper investigates how settlement speed affects financial stability in payment networks, accounting for netting benefits, liquidity costs, and counterparty risks. Faster settlement reduces crisis likelihood but amplifies crisis severity. The net welfare effect depends on network topology and proximity to default threshold points—settlement times at which the number of defaulting agents changes discontinuously. The optimal settlement speed is not universal: it depends on payment network structure and liquidity conditions. Deteriorating liquidity shifts the optimum toward slower settlement, even when faster settlement reduces counterparty default probability.

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  • Agostino Capponi & Jin-Wook Chang, 2025. "Settlement Speed and Financial Stability," Finance and Economics Discussion Series 2025-101r1, Board of Governors of the Federal Reserve System (U.S.), revised 05 Jun 2026.
    • Handle: RePEc:fip:fedgfe:2025-101
    DOI: 10.17016/FEDS.2025.101r1
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    References listed on IDEAS

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    1. Kahn, Charles M & McAndrews, James & Roberds, William, 2003. "Settlement Risk under Gross and Net Settlement," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 591-608, August.
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    Keywords

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    JEL classification:

    • D49 - Microeconomics - - Market Structure, Pricing, and Design - - - Other
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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