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Payment Instruments and Collateral in the Interbank Payment System

Listed author(s):
  • Hajime Tomura

    (Faculty of Political Science and Economics, Waseda University)

This paper presents a three-period model to analyze the need for bank reserves in the presence of other liquid assets like Treasury securities. If a pair of banks settle bank transfers without bank reserves, they must prepare extra liquidity for interbank payments, because depositors' demand for timely payments causes a hold-up problem in the bilateral settlement of bank transfers. In light of this result, the interbank payment system provided by the central bank can be regarded as an implicit interbank settlement contract to save liquidity. The central bank is necessary for this contract as the custodian of collateral. Bank reserves can be characterized as the balances of liquid collateral submitted by banks to participate into this contract. This result explains the rate-of-return dominance puzzle and the need for substitution between bank reserves and other liquid assets simultaneously. The optimal contract is the floor system, not only because it pays interest on bank reserves, but also because it eliminates the over- the-counter interbank money market. The model indicates it is efficient if all banks share the same custodian of collateral, which justifies the current practice that a public institution provides the interbank payment system.

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File URL: http://www.price.e.u-tokyo.ac.jp/img/researchdata/pdf/p_wp090.pdf
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Paper provided by University of Tokyo, Graduate School of Economics in its series UTokyo Price Project Working Paper Series with number 072.

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Length: 48 pages
Date of creation: Aug 2015
Date of revision: Sep 2016
Handle: RePEc:upd:utppwp:072
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University of Tokyo 702 Faculty of Economics, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo, 113-0033, Japan

Phone: +81-3-3812-2111
Web page: http://www.e.u-tokyo.ac.jp/
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