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Financial Stability Paper No 7: Liquidity Saving in Real-Time Gross Settlement Systems - an Overview

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  • Norman, Ben

    (Bank of England)

Abstract

During the past two decades, Large Value Payment Systems (LVPSs) in many countries have been redesigned so that the payments they process are settled on a ‘Real-Time Gross Settlement’ (RTGS) basis. Such systems eliminate interbank credit risk in the payment system — which, from the perspective of the Bank of England, is a key feature of the United Kingdom’s LVPS, CHAPS, and one which cannot be compromised by any future design changes. But such RTGS systems can require relatively large amounts of liquidity to be available. So some of the more recent RTGS system designs — for instance, TARGET2 (for euro payments); or Japan’s BOJ-Net — have incorporated sophisticated ‘liquidity saving mechanisms’. These mechanisms have allowed participants in the payment system to save on liquidity needs without reintroducing interbank credit risk. To support discussions among participants in CHAPS on possible liquidity saving mechanisms, this article sets out a conceptual framework for thinking about the drivers of liquidity needs in RTGS systems. It then discusses a number of practical liquidity saving measures, which can meet the good of greater liquidity efficiency without reintroducing credit risk.

Suggested Citation

  • Norman, Ben, 2010. "Financial Stability Paper No 7: Liquidity Saving in Real-Time Gross Settlement Systems - an Overview," Bank of England Financial Stability Papers 7, Bank of England.
    • Handle: RePEc:boe:finsta:0007
    Note: http://www.bankofengland.co.uk/financialstability/Pages/fpc/fspapers/fs_paper07.aspx
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    References listed on IDEAS

    as
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    Cited by:

    1. Evangelos Benos & Rodney J. Garratt & Peter Zimmerman, 2014. "The Role of Counterparty Risk in CHAPS Following the Collapse of Lehman Brothers," International Journal of Central Banking, International Journal of Central Banking, vol. 10(4), pages 143-172, December.
    2. Denbee, Edward & Garratt, Rodney & Zimmerman, Peter, 2014. "Variations in liquidity provision in real-time payment systems," Bank of England working papers 513, Bank of England.
    3. Rodney J. Garratt, 2022. "An Application of Shapley Value Cost Allocation to Liquidity Savings Mechanisms," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(6), pages 1875-1888, September.
    4. Shaun Byck & Ronald Heijmans, 2020. "How much liquidity would a liquidity-saving mechanism save if a liquidity-saving mechanism could save liquidity? A simulation approach for Canada's large-value payment system Shaun Byck," Working Papers 682, DNB.
    5. De Caux, Robert & Brede, Markus & McGroarty, Frank, 2016. "Payment prioritisation and liquidity risk in collateralised interbank payment systems," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 41(C), pages 139-150.
    6. Ball, Alan & Denbee, Edward & Manning, Mark & Wetherilt, Anne, 2011. "Financial Stability Paper No 11: Intraday Liquidity - Risk and Regulation," Bank of England Financial Stability Papers 11, Bank of England.
    7. Davey, Nick & Gray, Daniel, 2014. "How has the Liquidity Saving Mechanism reduced banks’ intraday liquidity costs in CHAPS?," Bank of England Quarterly Bulletin, Bank of England, vol. 54(2), pages 180-189.
    8. Alexandrova-Kabadjova Biliana & Solís-Robleda Francisco, 2013. "Managing Intraday Liquidity: The Mexican Experience," Working Papers 2013-01, Banco de México.
    9. Hellqvist, Matti & Laine, Tatu (ed.), 2012. "Diagnostics for the financial markets: computational studies of payment system: Simulator Seminar Proceedings 2009-2011," Bank of Finland Scientific Monographs, Bank of Finland, volume 0, number sm2012_045, July.

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    More about this item

    Keywords

    Large Value Payment Systems; Real-Time Gross Settlement;

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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