Congestion and cascades in payment systems

Walter E. Beyeler, Robert J. Glass, Morten Bech () and Kimmo Soramäki ()

Physica A: Statistical Mechanics and its Applications, 2007, vol. 384, issue 2, 693-718

Abstract: We develop a parsimonious model of the interbank payment system. The model incorporates an endogenous instruction arrival process, a scale-free topology of payments between banks, a fixed total liquidity which 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 0, the time for a bank to exhaust its liquidity endowment, and the liquidity market relaxation time. In the congested regime settlement takes place in cascades having a characteristic length scale. A global liquidity market substantially attenuates 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; Congestion (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (22)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:384:y:2007:i:2:p:693-718

DOI: 10.1016/j.physa.2007.05.061

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