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Using Synthetic Data to Measure the Impact of RTGS on Systemic Risk in the Australian Payments System

This paper examines the possibility that financial contagion may be spread from one bank to another via the Australian payments system. The initial study of payments system risk was undertaken by Humphrey (1986) who found significant risk in the U.S. Fedwire system in the mid 1980s. Subsequent studies by Angelini, Maresca & Russo (1996), Kuussaari (1996), Northcott (2002) and Furfine (2003) have found, however, little evidence of systemic risk in the payments systems of Italy, Finland and Canada, and in the U.S. inter-bank market. Given that the implementation of real time gross settlement (RTGS) systems in many countries, including Australia, at significant cost, has been designed to reduce payments system risk, the finding that this risk is small is significant. While detailed payments system data for Australia is not available to researchers outside the Reserve Bank, this study constructs a synthetic data set based on available information and uses this data to simulate the failure of each financial institution operating in the Australian payments system. We find little evidence of systemic risk in the Australian payments system using this approach and conclude that the introduction of RTGS in the Australian system in 1996 had only a marginal effect on risk.

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File URL: http://www.finance.uts.edu.au/research/wpapers/wp149.pdf
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Paper provided by Finance Discipline Group, UTS Business School, University of Technology, Sydney in its series Working Paper Series with number 149.

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Length: 41
Date of creation: 01 May 2006
Date of revision:
Publication status: Published as: Docherty, P.. and Wang, G., 201, "Using Synthetic Data to Measure the Impact of RTGS on Systemic Risk in the Australian Payments System", Journal of Financial Stability, 6(2), 103-117.
Handle: RePEc:uts:wpaper:149
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  1. Schmiedel, Heiko & Malkamaki, Markku & Tarkka, Juha, 2006. "Economies of scale and technological development in securities depository and settlement systems," Journal of Banking & Finance, Elsevier, vol. 30(6), pages 1783-1806, June.
  2. Mark J. Flannery, 1996. "Financial crises, payment system problems, and discount window lending," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 804-831.
  3. James J. McAndews & George Wasilyew, 1995. "Simulations of failure in a payment system," Working Papers 95-19, Federal Reserve Bank of Philadelphia.
  4. David B. Humphrey & Lawrence B. Pulley & Jukka M. Vesala, 1996. "Cash, paper, and electronic payments: a cross-country analysis," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 914-941.
  5. Eugene Amromin & Sujit Chakravorti, 2007. "Debit card and cash usage: a cross-country analysis," Working Paper Series WP-07-04, Federal Reserve Bank of Chicago.
  6. Berger, Allen N & Hancock, Diana & Marquardt, Jeffrey C, 1996. "A Framework for Analyzing Efficiency, Risks, Costs, and Innovations in the Payments System," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 696-732, November.
  7. Wilko Bolt & David Humphrey, 2007. "Payment network scale economies, SEPA, and cash replacement," Working Papers 07-32, Federal Reserve Bank of Philadelphia.
  8. Peter Docherty & Gehong Wang, 2009. "A Revided Exposition of the Methodology for Testing Payments Systems Risk," Working Paper Series 159, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  9. Christine Beijnen & Wilko Bolt, 2008. "Size Matters: Economies of Scale in European Payment Processing," FIW Working Paper series 013, FIW.
  10. Kuussaari, Harri, 1996. "Systemic Risk in the Finnish Payment System: an Empirical Investigation," Research Discussion Papers 3/1996, Bank of Finland.
  11. James McAndrews & Samira Rajan, 2000. "The timing and funding of Fedwire funds transfers," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 17-32.
  12. Kaufman, George G, 1996. "Comment on Financial Crises, Payment System Problems, and Discount Window Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 825-31, November.
  13. Rochet, Jean-Charles & Tirole, Jean, 1996. "Controlling Risk in Payment Systems," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 832-62, November.
  14. Christian Upper & Andreas Worms, 2001. "Estimating bilateral exposures in the German interbank market: is there a danger of contagion?," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 211-229 Bank for International Settlements.
  15. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-76, June.
  16. Hasan, Iftekhar & Malkamaki, Markku & Schmiedel, Heiko, 2003. "Technology, automation, and productivity of stock exchanges: International evidence," Journal of Banking & Finance, Elsevier, vol. 27(9), pages 1743-1773, September.
  17. Humphrey, David B & Pulley, Lawrence B & Vesala, Jukka M, 1996. "Cash, Paper, and Electronic Payments: A Cross-Country Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 914-39, November.
  18. Carol Ann Northcott, 2002. "Estimating Settlement Risk and the Potential for Contagion in Canada's Automated Clearing Settlement System," Working Papers 02-41, Bank of Canada.
  19. Kenneth N. Kuttner & Adam S. Posen, 2001. "The Great Recession: Lessons for Macroeconomic Policy from Japan," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(2), pages 93-186.
  20. Furfine, Craig H, 2003. " Interbank Exposures: Quantifying the Risk of Contagion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(1), pages 111-28, February.
  21. Angelini, P. & Maresca, G. & Russo, D., 1996. "Systemic risk in the netting system," Journal of Banking & Finance, Elsevier, vol. 20(5), pages 853-868, June.
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