Liquidity costs and tiering in large-value payment systems

Mark Adams (), Marco Galbiati and Simone Giansante
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Mark Adams: Bank of England, Postal: Publications Group Bank of England Threadneedle Street London EC2R 8AH

No 399, Bank of England working papers from Bank of England

Abstract: This paper develops and simulates a model of the emergence of networks in an interbank, RTGS payment system. A number of banks, faced with random streams of payment orders, choose whether to link directly to the payment system, or to use a correspondent bank. Settling payments directly on the system imposes liquidity costs which depend on the maximum liquidity overdraft incurred during the day. On the other hand, using a correspondent entails paying a flat fee, charged by the correspondent to recoup liquidity costs and to extract a profit. We specify a protocol whereby one bank in each period can revisit its choice whether to link directly to the system, or to become clients of other banks, thus generating a dynamic client-correspondent network. We simulate this protocol, observing the emergence of different network structures. The liquidity pricing regime chosen by a central bank is found to affect the tiering process and the network structures it produces. A calibration exercise on data from the UK CHAPS system suggests that the model is able to generate realistic predictions, ie a network topology similar to that observed in reality, driven solely by the underlying pattern of payments and the structure of liquidity costs.

Keywords: Tiering; liquidity cost; large-value payment system; RTGS; network formation (search for similar items in EconPapers)
JEL-codes: C70 G20 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2010-07-29
New Economics Papers: this item is included in nep-ban and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0399

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