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Payment System Settlement and Bank Incentives

Charles Kahn and William Roberds

The Review of Financial Studies, 1998, vol. 11, issue 4, 845-70

Abstract: In this article, we consider the relative merits of net versus gross settlement of interbank payments. Net settlement economizes on the costs of holding non-interest-bearing reserves, but increases moral hazard problems. The 'put option' value of default under net settlement can also distort banks' investment incentives. Absent these distortions, net settlement dominates gross, although the optimal net settlement scheme may involve a positive probability of default. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Date: 1998
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Working Paper: Payment system settlement and bank incentives (1997)
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The Review of Financial Studies is currently edited by Itay Goldstein

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