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Settlement delays in the money market

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  • Leonardo Bartolini
  • R. Spence Hilton
  • James J. McAndrews

Abstract

We track 38,000 money market trades from execution to delivery and return to provide a first empirical analysis of settlement delays in financial markets. In line with predictions from recent models showing that financial claims are settled strategically, we document a tendency by lenders to delay delivery of loaned funds until the afternoon hours. We find that banks follow a simple strategy to manage the risk of account overdrafts - delaying the settlement of large payments relative to that of small payments. More sophisticated strategies, such as increasing settlement delays when own liquid balances are low and when dealing with small trading partners, play a marginal role. We also find evidence of strategic delay in the return of borrowed funds, although we can explain a smaller fraction of the dispersion in delays in the return than in the delivery leg of money market lending.

Suggested Citation

  • Leonardo Bartolini & R. Spence Hilton & James J. McAndrews, 2008. "Settlement delays in the money market," Staff Reports 319, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:319
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Morten L. Bech & Carl T. Bergstrom & Rod Garratt & Martin Rosvall, 2011. "Mapping change in the federal funds market," Staff Reports 507, Federal Reserve Bank of New York.
    2. Bech, Morten L. & Atalay, Enghin, 2010. "The topology of the federal funds market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(22), pages 5223-5246.
    3. Quinn, Stephen & Roberds, William, 2014. "How Amsterdam got fiat money," Journal of Monetary Economics, Elsevier, vol. 66(C), pages 1-12.
    4. Pokutta, Sebastian & Schmaltz, Christian, 2011. "Managing liquidity: Optimal degree of centralization," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 627-638, March.
    5. repec:eee:jfinec:v:125:y:2017:i:1:p:200-215 is not listed on IDEAS
    6. Thomas Nellen, 2015. "Collateralised liquidity, two-part tariff and settlement coordination," Working Papers 2015-13, Swiss National Bank.
    7. Elizabeth C. Klee, 2011. "The first line of defense: the discount window during the early stages of the financial crisis," Finance and Economics Discussion Series 2011-23, Board of Governors of the Federal Reserve System (U.S.).
    8. B. Craig & D. Salakhova & M. Saldias, 2018. "Payments delay: propagation and punishment," Working papers 671, Banque de France.
    9. Pritsker, Matthew, 2013. "Knightian uncertainty and interbank lending," Journal of Financial Intermediation, Elsevier, vol. 22(1), pages 85-105.
    10. Babus, Ana & Hu, Tai-Wei, 2017. "Endogenous intermediation in over-the-counter markets," Journal of Financial Economics, Elsevier, vol. 125(1), pages 200-215.
    11. Bech, Morten L. & Bergstrom, Carl T. & Rosvall, Martin & Garratt, Rodney J., 2015. "Mapping change in the overnight money market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 424(C), pages 44-51.
    12. Maddaloni, Giuseppe, 2015. "Liquidity risk and policy options," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 514-527.
    13. Afonso, Gara M. & Lagos, Ricardo, 2012. "An empirical study of trade dynamics in the interbank market," Staff Reports 550, Federal Reserve Bank of New York, revised 01 Jun 2014.

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    Keywords

    Money market ; Banks and banking ; Game theory ; Electronic funds transfers;

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