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The CLS Bank: A Solution to the Risks of International Payments Settlement?

Posted: 1 Feb 2001  

Charles M. Kahn

University of Illinois, Urbana-Champaign; Feseral Reserve Bank of Saint Louis; Bank of Canada

William Roberds

Federal Reserve Bank of Atlanta

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Abstract

Foreign exchange transactions are subject to a unique type of settlement risk. This risk ultimately stems from the difficulty of coordinating separate settlements in two different currencies. Settlement of foreign exchange transactions through the proposed CLS ("Continuous Linked Settlement") Bank has been discussed as a potential solution to this problem. This paper describes the CLS proposal and analyzes the incentives it places on banks engaged in foreign exchange transactions. The analysis shows that while settlement through the CLS Bank may represent an improvement over current arrangements, some important problems associated with foreign exchange settlements will remain.

Keywords: Foreign exchange, settlement risk

JEL Classification: G20, F31

Suggested Citation

Kahn, Charles M. and Roberds, William, The CLS Bank: A Solution to the Risks of International Payments Settlement?. Carnegie-Rochester Conf. Series on Public Policy. Available at SSRN: https://ssrn.com/abstract=253695

Charles M. Kahn

University of Illinois, Urbana-Champaign ( email )

Department of Finance
340 Wohlers Hall
Champaign, IL 61820
United States

HOME PAGE: http://kahnfrance.com/cmk/

Feseral Reserve Bank of Saint Louis

411 Locust St
Saint Louis, MO 63011
United States

Bank of Canada

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

William Roberds (Contact Author)

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-498-8970 (Phone)
404-498-8956 (Fax)

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