tailieunhanh - Working Paper No. 400 Liquidity-saving mechanisms and bank behaviour

Such central queues are called ‘liquidity-saving mechanisms’ (LSMs). There are a number of studies on plain RTGS systems, but only a few on RTGS systems augmented with LSMs. Our work contributes to this line of research. We first model a benchmark system, ie a plain RTGS system where each bank decides: (i) the amount of liquidity to use; (ii) which payments to delay in an internal queue (payments are made as banks randomly receive payment orders, which need be executed with different ‘urgency’). The benchmark model is then compared to an RTGS–plus–LSM system, where banks decide: (i) the amount. | Working Paper No. 400 Liquidity-saving mechanisms and bank behaviour Marco Galbiati and Kimmo Soramaki July 2010 BANK OF ENGLAND Working Paper No. 400 Liquidity-saving mechanisms and bank behaviour Marco Galbiati 1 and Kimmo Soramaki1 2 Abstract This paper investigates the effect of liquidity-saving mechanisms LSMs in interbank payment systems. We model a stylised two-stream payment system where banks choose a how much liquidity to post and b which payments to route into each of two streams the RTGS stream and an LSM stream. Looking at equilibrium choices we find that when liquidity is expensive the two-stream system is more efficient than the vanilla RTGS system without an LSM. This is because the LSM achieves better co-ordination of payments without introducing settlement risk. However the two-stream system still only achieves a second-best in terms of efficiency in many cases a central planner could further decrease system-wide costs by imposing higher liquidity holdings and without using the LSM at all. Hence the appeal of the LSM resides in its ability to ease but not completely solve strategic inefficiencies stemming from externalities and free-riding. Second bad equilibria too are theoretically possible in the two-stream system. In these equilibria banks post large amounts of liquidity and at the same time overuse the LSM. The existence of such equilibria suggests that some co-ordination device may be needed to reap the full benefits of an LSM. In all cases these results are valid for this particular model of an RTGS payment system and the particular LSM. Key words Payment system RTGS liquidity-saving mechanism. JEL classification C7. 1 Bank of England. Email 2 Helsinki University of Technology. Email kimmo@ The views expressed in this paper are those of the authors and not necessarily those of the Bank of England. The authors thank participants in the 6th Bank of Finland Simulator Seminar Helsinki 25-27 August