An Efficient Liquidity Savings Mechanism

Abstract

Liquidity savings mechanisms (LSMs) reduce the quantity of reserve balances that banks need to process payments. An LSM can mitigate coordination failures in which banks delay their payments to each other because they expect that other banks will do the same. We provide the design and properties of a maximally efficient new form of LSM.

Keywords: Payment systems, liquidity savings mechanisms, reserve balances, central bank balance sheets, mechanism design