A Revided Exposition of the Methodology for Testing Payments Systems Risk
Financial economists and central bankers have been concerned for some time about the possibility of financial contagion spreading from bank to bank via interbank exposures within the 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), Furfine (2003) and Wang & Docherty (2006) have found, however, little evidence of systemic risk in the payments systems of Italy, Finland, Canada, Australia and in the U.S. inter-bank market. All of these studies employ a methodology in which the effects of a simulated failure at one institution on other institutions are examined and quantified but no formal statement of the simulation process is usually provided. One exception to this is the study by Wang & Docherty (2006) but it is possible to further refine and sharpen the exposition offered in that study. The objective of this short paper is simply to provide such an updated and refined exposition of the default simulation methodology used in payments system risk research.
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- Peter Docherty & G Wang, 2006.
"Using Synthetic Data to Measure the Impact of RTGS on Systemic Risk in the Australian Payments System,"
Working Paper Series
149, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
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- Upper, Christian & Worms, Andreas, 2004.
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European Economic Review,
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- Upper, Christian & Worms, Andreas, 2002. "Estimating Bilateral Exposures in the German Interbank Market: Is there a Danger of Contagion?," Discussion Paper Series 1: Economic Studies 2002,09, Deutsche Bundesbank, Research Centre.
- Carol Ann Northcott, 2002. "Estimating Settlement Risk and the Potential for Contagion in Canada's Automated Clearing Settlement System," Staff Working Papers 02-41, Bank of Canada.
- 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.
- 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.
- James J. McAndrews & George Wasilyew, 1995. "Simulations of failure in a payment system," Working Papers 95-19, Federal Reserve Bank of Philadelphia.
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