Optimal Dynamic Clearing for Interbank Payments

Shuzhen Chen (), Opher Baron () and Ningyuan Chen ()
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Shuzhen Chen: Business School, Central South University, Changsha, Hunan 410083, China
Opher Baron: SiMLQ, Toronto, Ontario M5S3E6, Canada
Ningyuan Chen: Rotman School of Management, University of Toronto, Toronto, Ontario M5S3E6, Canada

Management Science, 2025, vol. 71, issue 4, 2953-2974

Abstract: We investigate the optimal clearing policy for a financial payment system composed of a number of member banks and a central bank in a dynamic setting, when new payment obligations or debts between member banks are generated over time. The central bank clears the debts among members in the system in order to minimize the costs, including the setup cost of each clearing, the variable cost of clearing the net debts, and the liquidity cost of uncleared debts. We formulate the problem using dynamic programming via state space reduction that provides a tractable framework to analyze and compute the optimal policy. We characterize the structure of the optimal policy and show that it is optimal for the central bank either to clear all the debts in the system or not to clear at all in each period under mild conditions. This structure leads to efficient computation of the optimal clearing policy. We further characterize the optimal clearing frequency based upon the deterministic approximation for the debt process. We conduct a comprehensive case study based on the data acquired from our industry partner, Payments Canada, to demonstrate the performance of the policy and its feasibility in industrial-size problems.

Keywords: dynamic programming; inventory management; interbank payments; clearing policy (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:71:y:2025:i:4:p:2953-2974

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