Systemic Risk and Liquidity in Payment Systems

49 Pages Posted: 9 Nov 2008 Last revised: 10 Nov 2010

See all articles by Gara Afonso

Gara Afonso

Federal Reserve Bank of New York

Hyun Song Shin

Bank for International Settlements (BIS)

Date Written: March 1, 2009

Abstract

We study liquidity and systemic risk in high-value payment systems. Flows in high-value systems are characterized by high velocity, meaning that the total amount paid and received is high relative to the stock of reserves. In such systems, banks rely heavily on incoming funds to finance outgoing payments, necessitating a high degree of coordination and synchronization. We use lattice-theoretic methods to solve for the unique fixed point of an equilibrium mapping and conduct comparative statics analyses on changes to the environment. We find that banks attempting to conserve liquidity cause an increase in the demand for intraday credit and, ultimately, a disruption of payments. Additionally, we find that when a bank is identified as vulnerable to failure and other banks choose to cancel payments to that bank, there are systemic repercussions for the whole financial system.

Keywords: systemic risk, financial networks, high-value payment systems, precautionary demand

JEL Classification: E58, G21, D85, E44

Suggested Citation

Afonso, Gara and Shin, Hyun Song, Systemic Risk and Liquidity in Payment Systems (March 1, 2009). FRB of New York Staff Report No. 352. Available at SSRN: https://ssrn.com/abstract=1297363 or http://dx.doi.org/10.2139/ssrn.1297363

Gara Afonso (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

HOME PAGE: http://nyfedeconomists.org/afonso

Hyun Song Shin

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

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