An Economic Analysis of Liquidity-Saving Mechanisms

15 Pages Posted: 9 Jun 2008

See all articles by Antoine Martin

Antoine Martin

Federal Reserve Bank of New York - Research and Statistics

James McAndrews

Wharton Financial Institutions Center

Abstract

A recent innovation in large-value payments systems has been the design and implementation of liquidity-saving mechanisms (LSMs), tools used in conjunction with real-time gross settlement (RTGS) systems. LSMs give system participants, such as banks, an option not offered by RTGS alone: they can queue their outgoing payments. Queued payments are released if some prespecified event occurs. LSMs can reduce the amount of central bank balances necessary to operate a payments system as well as quicken settlement. This article analyzes the performance of RTGS systems with and without the addition of an LSM. The authors find that, in terms of settling payments early, these mechanisms typically outperform pure RTGS systems. However, there are times when RTGS systems can be preferable to LSMs, such as when many banks that send payments early in RTGS choose to queue their payments when an LSM is available. The authors also show that the design of a liquidity-saving mechanism has important implications for the welfare of system participants, even in the absence of payment netting. In particular, the parameters specified determine whether the addition of an LSM increases or decreases welfare.

Keywords: Liquidity-saving mechanisms, real-time gross settlement, large-value payments systems

JEL Classification: E42, E58, G21

Suggested Citation

Martin, Antoine and McAndrews, James, An Economic Analysis of Liquidity-Saving Mechanisms. Federal Reserve Bank of New York Research Paper Series - Economic Policy Review, Available at SSRN: https://ssrn.com/abstract=1141361 or http://dx.doi.org/10.2139/ssrn.1141361

Antoine Martin (Contact Author)

Federal Reserve Bank of New York - Research and Statistics ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6943 (Phone)

James McAndrews

Wharton Financial Institutions Center ( email )

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States
9176090086 (Phone)
19104 (Fax)

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