Illiquidity in the Interbank Payment System Following Wide-Scale Disruptions
30 Pages Posted: 13 Mar 2006
Date Written: March 2006
We show how the interbank payment system can become illiquid following wide-scale disruptions. Two forces are at play in such disruptions - operational problems and changes in participants' behavior. We model the interbank payment system as an n-player game and utilize the concept of a potential function to describe the process by which one of multiple equilibria emerges after a wide-scale disruption. If the disruption is large enough, hits a key geographic area, or hits a too-big-to-fail participant, then the coordination of payment processing can break down, and central bank intervention might be required to reestablish the socially efficient equilibrium. We also explore how the network topology of the underlying payment flow among banks affects the resiliency of coordination. The paper provides a theoretical framework to analyze the effects of events such as the September 11 attacks.
Keywords: payments, stag hunt, network, topology, moral suasion, too big to fail
JEL Classification: C72, E58
Suggested Citation: Suggested Citation