Payment prioritisation and liquidity risk in collateralised interbank payment systems

Robert De Caux, Markus Brede and Frank McGroarty

Journal of International Financial Markets, Institutions and Money, 2016, vol. 41, issue C, 139-150

Abstract: Participants in interbank payment systems manage a stream of payment requests of varying priority to minimise their total costs. However, individually optimal strategies may conflict with system-wide optimality and can lead to inefficient equilibria, where banks cannot meet obligations in a timely manner. We construct a model of a collateralised payment system and demonstrate that socially optimal states exist in which banks should delay a proportion of non-priority payments in an internal queue, but banks’ strategising behaviour leads to liquidity hoarding and increased systemic cost. We discuss how this behaviour can be reduced using measures available to a regulator.

Keywords: Payment systems; Agent based; Game theory; Simulation; Policy (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:41:y:2016:i:c:p:139-150

DOI: 10.1016/j.intfin.2015.12.009

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