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The welfare effects of a liquidity-saving mechanism

  • Enghin Atalay
  • Antoine Martin
  • James McAndrews

This paper considers the welfare effect of introducing a liquidity-saving mechanism (LSM) in a real-time gross settlement (RTGS) payment system. We study the planner's problem to get a better understanding of the economic role of an LSM and find that an LSM can achieve the planner's allocation for some parameter values. The planner's allocation cannot happen without an LSM, as long as some payments can be delayed without cost. We show that, in equilibrium with an LSM, there can be either too few or too many payments settled early compared with the planner's allocation, depending on the parameter values. Using Fedwire data to calibrate our model, we describe the equilibrium that would arise with an LSM and compare welfare with and without an LSM. Our results suggest that introducing an LSM could have significant benefits.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 331.

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Date of creation: 2008
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Handle: RePEc:fip:fednsr:331
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  1. Kahn, Charles M. & Roberds, William, 2001. "The CLS bank: a solution to the risks of international payments settlement?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 54(1), pages 191-226, June.
  2. Jamie McAndrews & Antoine Martin, 2007. "Liquidity saving mechanisms," 2007 Meeting Papers 165, Society for Economic Dynamics.
  3. Angelini, Paolo, 2000. "Are Banks Risk Averse? Intraday Timing of Operations in the Interbank Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 54-73, February.
  4. David C. Mills, Jr. & 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.).
  5. Morten L. Bech & Bart Hobijn, 2007. "Technology Diffusion within Central Banking: The Case of Real-Time Gross Settlement," International Journal of Central Banking, International Journal of Central Banking, vol. 3(3), pages 147-181, September.
  6. Bech, Morten L. & Garratt, Rod, 2003. "The intraday liquidity management game," Journal of Economic Theory, Elsevier, vol. 109(2), pages 198-219, April.
  7. Kurt Johnson & James J. McAndrews & Kimmo Soramaki, 2004. "Economizing on liquidity with deferred settlement mechanisms," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 51-72.
  8. Angelini, Paolo, 1998. "An analysis of competitive externalities in gross settlement systems," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 1-18, January.
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