Payment system settlement and bank incentives

Charles Kahn and William Roberds

No 96-10, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

Abstract: In this paper 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. Net settlement becomes more attractive relative to gross settlement if bank assets have to be liquidated at less than book value.

Keywords: Financial institutions; Financial services industry; Payment systems (search for similar items in EconPapers)
Date: 1996
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Citations: View citations in EconPapers (12)

Published in Review of Financial Studies, Winter 1998

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Related works:
Journal Article: Payment System Settlement and Bank Incentives (1998)
Working Paper: Payment system settlement and bank incentives (1997)
Working Paper: Payment System Settlement and Bank Incentives
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