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Balancing the payment system

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  • Fleischman, Tomaž
  • Dini, Paolo

Abstract

The increasingly complex economic and financial environment in which we live makes the management of liquidity in payment systems and the economy in general a persistent challenge. New technologies are making it possible to address this challenge through alternative solutions that complement and strengthen existing payment systems. For example, the interbank balancing method can also be applied to private payment systems, complementary currencies, and trade credit clearing systems to provide better liquidity and risk management. In this paper we introduce the concept of a balanced payment system and demonstrate the effects of balancing on a small example. We show how to construct a balanced payment subsystem that can be settled in full and, therefore, that can be removed from the payment system to achieve liquidity-saving and payments gridlock resolution. We also briefly introduce a generalization of a payment system and of the method to balance it in the form of a specific application (Tetris Core Technologies), whose wider adoption could contribute to the financial stability of and better management of liquidity and risk for the whole economy.

Suggested Citation

  • Fleischman, Tomaž & Dini, Paolo, 2020. "Balancing the payment system," LSE Research Online Documents on Economics 107416, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:107416
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    File URL: http://eprints.lse.ac.uk/107416/
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    References listed on IDEAS

    as
    1. Foote, Elizabeth, 2014. "Information asymmetries and spillover risk in settlement systems," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 179-190.
    2. Leinonen, Harry, 2005. "Liquidity, risks and speed in payment and settlement systems : a simulation approach," Scientific Monographs, Bank of Finland, number 2005_031.
    3. repec:zbw:bofism:2005_031 is not listed on IDEAS
    4. Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
    5. repec:zbw:bofrdp:2001_009 is not listed on IDEAS
    6. Bech, Morten L. & Soramäki, Kimmo, 2001. "Gridlock resolution in interbank payment systems," Research Discussion Papers 9/2001, Bank of Finland.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Fleischman, Tomaž & Dini, Paolo & Littera, Giuseppe, 2020. "Liquidity-saving through obligation-clearing and mutual credit: an effective monetary innovation for SMEs in times of crisis," LSE Research Online Documents on Economics 107529, London School of Economics and Political Science, LSE Library.
    2. Tomaž Fleischman & Paolo Dini & Giuseppe Littera, 2020. "Liquidity-Saving through Obligation-Clearing and Mutual Credit: An Effective Monetary Innovation for SMEs in Times of Crisis," JRFM, MDPI, vol. 13(12), pages 1-30, November.

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    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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