The Impact of De-Tiering in the United Kingdom's Large-Value Payment System
27 Pages Posted: 13 Sep 2017
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The Impact of De-Tiering in the United Kingdom's Large-Value Payment System
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: Suggested Citation