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A study of competing designs for a liquidity-saving mechanism

  • Antoine Martin
  • James McAndrews

We study two designs for a liquidity-saving mechanism (LSM), a queuing arrangement used with an interbank settlement system. We consider an environment where banks are subjected to liquidity shocks. Banks must make the decision to send, queue, or delay their payments after observing a noisy signal of the shock. With a balance-reactive LSM, banks can set a balance threshold below which payments are not released from the queue. Banks can choose their threshold such that the release of a payment from the queue is conditional on the liquidity shock. With a receipt-reactive LSM, a payment is released from the queue if an offsetting payment is received, regardless of the liquidity shock. We find that these two designs have opposite effects on different types of payments. Payments that are costly to delay will be settled at least as early, or earlier, with a receipt-reactive LSM. Payments that are not costly to delay will always be delayed with a receipt-reactive LSM, while some of them will be queued and settled early with a balance-reactive LSM. We also show that parameter values will determine which system provides higher welfare.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 336.

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Date of creation: 2008
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Handle: RePEc:fip:fednsr:336
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  1. Serifsoy, Baris & Wei[ss], Marco, 2007. "Settling for efficiency - A framework for the European securities transaction industry," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 3034-3057, October.
  2. Leinonen (ed), Harry, 2007. "Simulation studies of liquidity needs, risks and efficiency in payment networks," Scientific Monographs E:39/2007, Bank of Finland.
  3. Angelini, Paolo, 2000. "Erratum [Are Banks Risk Averse? Intraday Timing of Operations in the Interbank Market]," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 442, August.
  4. Morten L. Bech & Bart Hobijn, 2006. "Technology diffusion within central banking: the case of real-time gross settlement," Staff Reports 260, Federal Reserve Bank of New York.
  5. Martin, Antoine, 2004. "Optimal pricing of intraday liquidity," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 401-424, March.
  6. Lester Benjamin, 2009. "Settlement Systems," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-35, May.
  7. Serifsoy, Baris, 2007. "Stock exchange business models and their operative performance," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 2978-3012, October.
  8. Koppl, Thorsten V. & Monnet, Cyril, 2007. "Guess what: It's the settlements! Vertical integration as a barrier to efficient exchange consolidation," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 3013-3033, October.
  9. Jamie McAndrews & Antoine Martin, 2007. "Liquidity saving mechanisms," 2007 Meeting Papers 165, Society for Economic Dynamics.
  10. 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.
  11. 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.
  12. 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.
  13. Kauko, Karlo, 2005. "Interlinking securities settlement systems: a strategic commitment?," Working Paper Series 0427, European Central Bank.
  14. Xavier Freixas & Bruno Parigi, 1998. "Contagion and efficiency in gross and net interbank payment systems," Proceedings 592, Federal Reserve Bank of Chicago.
  15. Milne, Alistair, 2007. "The industrial organization of post-trade clearing and settlement," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 2945-2961, October.
  16. Angelini, Paolo, 1998. "An analysis of competitive externalities in gross settlement systems," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 1-18, January.
  17. Enghin Atalay & Antoine Martin & James McAndrews, 2008. "The welfare effects of a liquidity-saving mechanism," Staff Reports 331, Federal Reserve Bank of New York.
  18. 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.
  19. Van Cayseele, Patrick & Wuyts, Christophe, 2007. "Cost efficiency in the European securities settlement and depository industry," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 3058-3079, October.
  20. Charles M. Kahn & William Roberds, 2000. "The CLS Bank: a solution to the risks of international payments settlement?," Working Paper 2000-15, Federal Reserve Bank of Atlanta.
  21. Matthew Willison, 2005. "Real-Time Gross Settlement and hybrid payment systems: a comparison," Bank of England working papers 252, Bank of England.
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