30 Pages Posted: 9 Jun 2008
The Federal Reserve's Fedwire funds transfer service-the biggest large-value payments system in the United States-has long displayed a peak of activity in the late afternoon. Theory suggests that the concentration of late-afternoon Fedwire activity reflects coordination among participating banks to reduce liquidity costs, delay costs, and credit risk; as these costs and risk change over time, payment timing most likely will be affected. This article seeks to quantify how the changing environment in which Fedwire operates has affected the timing of payment value transferred within the system between 1998 and 2006. It finds that the peak of the timing distribution has become more concentrated, has shifted to later in the day, and has actually divided into two peaks. The authors suggest that these trends can be explained by a rise in the value of payments transferred over Fedwire, the settlement patterns of the private settlement institutions that use the system, and an increase in industry concentration. Although the study's results provide no specific evidence of heightened operational risk attributable to activity occurring later in the day, they point to a high level of interaction between Fedwire and private settlement institutions.
Keywords: Fedwire, timing of payments, large payment systems
JEL Classification: E4, E41, E58, G28
Suggested Citation: Suggested Citation
Armantier, Olivier and McAndrews, James and Arnold, Jeffrey, Changes in the Timing Distribution of Fedwire Funds Transfers. Economic Policy Review, Vol. 14, No. 2, September 2008. Available at SSRN: https://ssrn.com/abstract=1141334 or http://dx.doi.org/10.2139/ssrn.1141334