Settlement Speed and Financial Stability

Agostino Capponi () and Jin-Wook Chang

No 2025-101r1, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper investigates how settlement speed affects financial stability in payment networks, accounting for netting benefits, liquidity costs, and counterparty risks. Faster settlement reduces crisis likelihood but amplifies crisis severity. The net welfare effect depends on network topology and proximity to default threshold points—settlement times at which the number of defaulting agents changes discontinuously. The optimal settlement speed is not universal: it depends on payment network structure and liquidity conditions. Deteriorating liquidity shifts the optimum toward slower settlement, even when faster settlement reduces counterparty default probability.

Keywords: Settlement; Payment systems; Financial network; Financial stability; Systemic risk (search for similar items in EconPapers)
JEL-codes: D49 D53 G01 G21 G33 (search for similar items in EconPapers)
Pages: 70 p.
Date: 2025-11-20, Revised 2026-06-05
New Economics Papers: this item is included in nep-net
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2025-101

DOI: 10.17016/FEDS.2025.101r1

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