The Impact of De-Tiering in the United Kingdom's Large-Value Payment System

27 Pages Posted: 13 Sep 2017

See all articles by Evangelos Benos

Evangelos Benos

Bank of England

Gerardo Ferrara

Bank of England

Pedro Gurrola-Perez

World Federation of Exchanges

Multiple version iconThere are 2 versions of this paper

Date Written: September 08, 2017

Abstract

Large-value payment systems (LVPS) often have a tiered structure where only a limited number of banks have direct access to these systems and every other institution accesses the system through agency arrangements with the direct participants. As such, a high degree of tiering is often perceived as being associated with credit and operational risks. In this paper we use data around five recent de-tiering events in the United Kingdom’s LVPS (CHAPS), to assess the impact of de-tiering on these risks as well as on liquidity usage. We find that the impact of de-tiering is largest on credit risk, where average intraday exposures between first and second-tier banks drop by anywhere between £0.3 billion and £1.5 billion per bank, while the cost of insuring against losses arising from these exposures drops by about £4 million to £19 million per bank, per year. On the other hand, the impact of these de-tiering events on operational risk and liquidity usage appears to be economically small.

Keywords: Payment systems, tiering

JEL Classification: E42, G23

Suggested Citation

Benos, Evangelos and Ferrara, Gerardo and Gurrola Perez, Pedro, The Impact of De-Tiering in the United Kingdom's Large-Value Payment System (September 08, 2017). Bank of England Working Paper No. 676, Available at SSRN: https://ssrn.com/abstract=3035204 or http://dx.doi.org/10.2139/ssrn.3035204

Evangelos Benos (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Gerardo Ferrara

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Pedro Gurrola Perez

World Federation of Exchanges ( email )

125 Old Broad Street
London, EC2N 1AR
United Kingdom
EC2N 1AR (Fax)

HOME PAGE: http://www.world-exchanges.org

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