Congestion and Cascades in Payment Systems

39 Pages Posted: 27 Sep 2006

See all articles by Walter Beyeler

Walter Beyeler

Sandia National Laboratories

Robert Glass

Sandia National Laboratories

Morten L. Bech

Bank for International Settlements (BIS) - Committee on Payments and Market Infrastructures

Kimmo Soramaki

European Central Bank (ECB)

Date Written: September 2006

Abstract

We develop a parsimonious model of the interbank payment system to study congestion and the role of liquidity markets in alleviating congestion. The model incorporates an endogenous instruction arrival process, scale-free topology of payments between banks, fixed total liquidity that limits banks' capacity to process arriving instructions, and a global market that distributes liquidity. We find that at low liquidity, the system becomes congested and payment settlement loses correlation with payment instruction arrival, becoming coupled across the network. The onset of congestion is evidently related to the relative values of three characteristic times: the time for banks' net position to return to zero, the time for banks to exhaust their liquidity endowments, and the liquidity market relaxation time. In the congested regime, settlement takes place in cascades having a characteristic size. A global liquidity market substantially diminishes congestion, requiring only a small fraction of the payment-induced liquidity flow to achieve strong beneficial effects.

Keywords: network, topology, interbank, payment, money market, sandpile model

JEL Classification: C50, G20

Suggested Citation

Beyeler, Walter and Glass, Robert and Bech, Morten L. and Soramaki, Kimmo, Congestion and Cascades in Payment Systems (September 2006). FRB of New York Staff Report No. 259, Available at SSRN: https://ssrn.com/abstract=932594 or http://dx.doi.org/10.2139/ssrn.932594

Walter Beyeler

Sandia National Laboratories ( email )

Livermore, CA 94551
United States

Robert Glass

Sandia National Laboratories ( email )

Livermore, CA 94551
United States

Morten L. Bech (Contact Author)

Bank for International Settlements (BIS) - Committee on Payments and Market Infrastructures ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland
41612808923 (Phone)

Kimmo Soramaki

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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