The Role of Counterparty Risk in CHAPS Following the Collapse of Lehman Brothers
20 Pages Posted: 15 Dec 2014
Date Written: December 14, 2014
We study the impact of the global financial crisis on CHAPS, the United Kingdom’s large value payments system, over the period 2006-2009. Core infrastructures functioned smoothly throughout the crisis and settlement banks continued to meet their payment obligations. However, payments 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. We show that this slowdown is related to concerns about counterparty default risk, thereby identifying a new channel through which counterparty risk manifests itself in financial markets.
Keywords: Payments, Counterparty risk, Intraday liquidity, Credit default swap
JEL Classification: E42
Suggested Citation: Suggested Citation