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An economic analysis of liquidity-saving mechanisms

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  • Antoine Martin
  • James J. McAndrews

Abstract

A recent innovation in large-value payments systems has been the design and implementation of liquidity-saving mechanisms (LSMs), tools used in conjunction with real-time gross settlement (RTGS) systems. LSMs give system participants, such as banks, an option not offered by RTGS alone: they can queue their outgoing payments. Queued payments are released if some prespecified event occurs. LSMs can reduce the amount of central bank balances necessary to operate a payments system as well as quicken settlement. This article analyzes the performance of RTGS systems with and without the addition of an LSM. The authors find that, in terms of settling payments early, these mechanisms typically outperform pure RTGS systems. However, there are times when RTGS systems can be preferable to LSMs, such as when many banks that send payments early in RTGS choose to queue their payments when an LSM is available. The authors also show that the design of a liquidity-saving mechanism has important implications for the welfare of system participants, even in the absence of payment netting. In particular, the parameters specified determine whether the addition of an LSM increases or decreases welfare.

Suggested Citation

  • Antoine Martin & James J. McAndrews, 2008. "An economic analysis of liquidity-saving mechanisms," Economic Policy Review, Federal Reserve Bank of New York, vol. 14(Sep), pages 25-39.
    • Handle: RePEc:fip:fednep:y:2008:i:sep:p:25-39:n:v.14no.2
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    References listed on IDEAS

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    1. Martin, Antoine & McAndrews, James, 2008. "Liquidity-saving mechanisms," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 554-567, April.
    2. Olivier Armantier & Jeffrey Arnold & James J. McAndrews, 2008. "Changes in the timing distribution of Fedwire funds transfers," Economic Policy Review, Federal Reserve Bank of New York, vol. 14(Sep), pages 83-112.
    3. Angelini, Paolo, 2000. "Are Banks Risk Averse? Intraday Timing of Operations in the Interbank Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 54-73, February.
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    6. Mills Jr., David C. & Nesmith, Travis D., 2008. "Risk and concentration in payment and securities settlement systems," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 542-553, April.
    7. Kurt Johnson & James J. McAndrews & Kimmo Soramaki, 2004. "Economizing on liquidity with deferred settlement mechanisms," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 51-72.
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