Bank Behaviour and Risks in Chaps Following the Collapse of Lehman Brothers

36 Pages Posted: 26 Jun 2012

Date Written: June 21, 2012

Abstract

We use payments data for the period 2006-09 to study the impact of the global financial crisis on payment patterns in CHAPS, the United Kingdom’s large-value wholesale payments system. CHAPS functioned smoothly throughout the crisis and all CHAPS settlement banks continued to meet their payment obligations. However, the data show that in the two months following the Lehman Brothers failure, banks did, on average, make payments at a slower pace than before the failure. Our analysis suggests this was partly explained by concerns about counter-party default risk as well as system-wide risk. The ratio of payments made to liquidity used was 30% lower in the period from 15 September 2008 to 30 September 2009 than in the period preceding the default of Lehman Brothers. This was due initially to payment delay, but later was due to banks making more payments with their own liquidity, probably because quantitative easing increased the amount of reserves in the system. To assess the economic significance of the observed delays in the value of payments settled, we develop risk indicators, based on Markov models, to quantify the theoretical liquidity impact of delays during an operational outage. We find that payment delays in the months following the failure of Lehman Brothers led to a statistically significant but economically modest increase in these risk measures.

Keywords: payments, intraday liquidity, credit default swap, operational outage, insurance

JEL Classification: E42

Suggested Citation

Benos, Evangelos and Garratt, Rodney and Zimmerman, Peter, Bank Behaviour and Risks in Chaps Following the Collapse of Lehman Brothers (June 21, 2012). Bank of England Working Paper No. 451, Available at SSRN: https://ssrn.com/abstract=2092668 or http://dx.doi.org/10.2139/ssrn.2092668

Evangelos Benos (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Rodney Garratt

Independent ( email )

Peter Zimmerman

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

HOME PAGE: http://https://sites.google.com/view/peter-zimmerman/

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