The Impact of Payment System Design on Tiering Incentives

Robert Arculus, Jennifer Hancock and Greg Moran
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Robert Arculus: Reserve Bank of Australia
Jennifer Hancock: Reserve Bank of Australia
Greg Moran: Reserve Bank of Australia

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: Tiering occurs when an institution does not participate directly in the central payment system but instead settles its payments through an agent. A high level of tiering can be a significant issue for payment system regulators because of the increased credit and concentration risk. This paper explores the impact of payment system design on institutions' incentives to tier using simulation analysis. Some evidence is found to support the hypothesis that the liquidity-saving mechanisms in Australia's real-time gross settlement (RTGS) system – the Reserve Bank Information and Transfer System (RITS) – reduce the liquidity cost of direct participation. This may have contributed to the low level of tiering in RITS relative to RTGS systems in other countries. We find no clear relationship between system design and the size of the substantial two-way exposures tiering creates between clients and their settlement banks. Our data suggest that more tiering would result in only small increases to the level of concentration in RITS.

Keywords: large-value payment systems; tiering; liquidity; simulation (search for similar items in EconPapers)
JEL-codes: E42 E58 G21 (search for similar items in EconPapers)
Date: 2012-10
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Citations: View citations in EconPapers (4)

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