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Systemic risk in alternative payment system designs

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  • Galos, Peter
  • Soramäki, Kimmo

Abstract

The paper analyses the consequences of an isolated, sudden and unexpected failure of a bank in alternative interbank payment system designs. We assess the exposures and the contagion by a counterfactual analysis assuming that payments currently settled by the pan-European large-value payment system, TARGET, are settled in alternative payment systems: an unsecured end-of-day net settlement system and a secured net settlement system with limits on intraday credit, with collateral and loss-sharing. The results indicate that systemic consequences of one bank's failure on the solvency of other banks can be rather low. If risk management techniques such as legal certainty for multilateral netting, limits on exposures, collateralisation and loss sharing are introduced, the systemic consequences can be mitigated to a high degree. How, and under which circumstances the analyzed failures would render other banks illiquid to meet their payment obligations is outside the scope of the paper. JEL Classification: E42, G21

Suggested Citation

  • Galos, Peter & Soramäki, Kimmo, 2005. "Systemic risk in alternative payment system designs," Working Paper Series 508, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2005508
    Note: 229713
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp508.pdf
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    References listed on IDEAS

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    1. De Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic risk: A survey," Working Paper Series 35, European Central Bank.
    2. Upper, Christian & Worms, Andreas, 2004. "Estimating bilateral exposures in the German interbank market: Is there a danger of contagion?," European Economic Review, Elsevier, vol. 48(4), pages 827-849, August.
    3. Angelini, P. & Maresca, G. & Russo, D., 1996. "Systemic risk in the netting system," Journal of Banking & Finance, Elsevier, vol. 20(5), pages 853-868, June.
    4. Jean-Charles Rochet & Jean Tirole, 1996. "Interbank lending and systemic risk," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 733-765.
    5. Furfine, Craig H, 2003. "Interbank Exposures: Quantifying the Risk of Contagion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(1), pages 111-128, February.
    6. repec:zbw:bofrdp:2003_023 is not listed on IDEAS
    7. James, Christopher, 1991. "The Losses Realized in Bank Failures," Journal of Finance, American Finance Association, vol. 46(4), pages 1223-1242, September.
    8. George Sheldon & Martin Maurer, 1998. "Interbank Lending and Systemic Risk: An Empirical Analysis for Switzerland," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 134(IV), pages 685-704, December.
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    Citations

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    Cited by:

    1. Kahn, Charles M. & Roberds, William, 2009. "Why pay? An introduction to payments economics," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 1-23, January.
    2. Aleksandra Bradic Martinovic, 2011. "Systemic Risks Control Aa a Determinant of Payment Systens Development in WB Countries," Book Chapters, in: Stefan Bogdan Salej & Dejan Eric & Srdjan Redzepagic & Ivan Stosic (ed.), Contemporary Issues in the Integration Processes of Western Balkan Countries in the European Union, chapter 26, pages 424-442, Institute of Economic Sciences.
    3. Augusto Hasman, 2013. "A Critical Review Of Contagion Risk In Banking," Journal of Economic Surveys, Wiley Blackwell, vol. 27(5), pages 978-995, December.
    4. Soramäki, Kimmo & Cook, Samantha, 2012. "Algorithm for identifying systemically important banks in payment systems," Economics Discussion Papers 2012-43, Kiel Institute for the World Economy (IfW Kiel).
    5. Soramäki, Kimmo & Cook, Samantha, 2013. "SinkRank: An algorithm for identifying systemically important banks in payment systems," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 7, pages 1-27.
    6. Jonnathan Cáceres Santos & René Aldazosa Inchauste, 2013. "Analizando el riesgo sistémico en Bolivia: una aplicación de modelos de topología de redes y simulación al funcionamiento del Sistema de Pagos de Alto Valor," Revista de Análisis del BCB, Banco Central de Bolivia, vol. 17(2(2012)-1), pages 45-80, January.

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    More about this item

    Keywords

    contagion; payment systems; systemic risk; TARGET;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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