Contagion and Efficiency in Gross and Net Interbank Payment Systems

Posted: 6 Apr 1998

See all articles by Xavier Freixas

Xavier Freixas

Universitat Pompeu Fabra; Centre for Economic Policy Research (CEPR); Barcelona Graduate School of Economics (Barcelona GSE)

Bruno Parigi

Università degli Studi di Padova

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Abstract

The increased fragility of the banking industry has generated growing concern about the risks associated with the payment systems. Although in most industrial countries different interbank payment systems coexist, little is really known about their properties in terms of risk and efficiency. We tackle this question by comparing the two main types of payment systems, gross and net, in a framework where uncertainty arises from several sources: the time of consumption, the location of consumption and the return on investment. Payments across locations can be made either by directly transferring liquidity or by transferring claims against the bank in the other location. The two mechanisms are interpreted as the gross and net settlement systems in interbank payments. We characterize the equilibria in the two systems and identify the trade-off in terms of safety and efficiency.

JEL Classification: G21, E51

Suggested Citation

Freixas, Xavier and Parigi, Bruno, Contagion and Efficiency in Gross and Net Interbank Payment Systems. Journal of Financial Intermediation, Vol. 7, No. 1. Available at SSRN: https://ssrn.com/abstract=74029

Xavier Freixas (Contact Author)

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
+34 93 542 2726 (Phone)
+34 93 542 1746 (Fax)

HOME PAGE: http://www.econ.upf.es/~freixas

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

HOME PAGE: http://www.econ.upf.es/~freixas/more/personal1.htm

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Bruno Parigi

Università degli Studi di Padova ( email )

Via 8 Febbraio, 2
Padova, Vicenza 35122
Italy

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