Liquidity Saving in Real-Time Gross Settlement Systems - An Overview

12 Pages Posted: 18 Mar 2011

See all articles by Ben Norman

Ben Norman

Bank of England - Monetary Analysis

Date Written: May 28, 2010

Abstract

During the past two decades, Large Value Payment Systems (LVPSs) in many countries have been redesigned so that the payments they process are settled on a ‘Real-Time Gross Settlement’ (RTGS) basis. Such systems eliminate interbank credit risk in the payment system - which, from the perspective of the Bank of England, is a key feature of the United Kingdom’s LVPS, CHAPS, and one which cannot be compromised by any future design changes. But such RTGS systems can require relatively large amounts of liquidity to be available. So some of the more recent RTGS system designs - for instance, TARGET2 (for euro payments); or Japan’s BOJ-Net - have incorporated sophisticated ‘liquidity saving mechanisms’. These mechanisms have allowed participants in the payment system to save on liquidity needs without reintroducing interbank credit risk. To support discussions among participants in CHAPS on possible liquidity saving mechanisms, this article sets out a conceptual framework for thinking about the drivers of liquidity needs in RTGS systems. It then discusses a number of practical liquidity saving measures, which can meet the good of greater liquidity efficiency without reintroducing credit risk.

Suggested Citation

Norman, Ben, Liquidity Saving in Real-Time Gross Settlement Systems - An Overview (May 28, 2010). Bank of England Financial Stability Paper No. 7, Available at SSRN: https://ssrn.com/abstract=1786686

Ben Norman (Contact Author)

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

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