Liquidity-Saving Mechanisms And Bank Behaviour

Date Added: Jul 2010
Format: PDF

This paper investigates the effect of Liquidity-Saving Mechanisms (LSMs) in interbank payment systems. The authors model a stylized two-stream payment system where banks choose how much liquidity to post and which payments to route into each of two 'Streams': the RTGS stream, and an LSM stream. Looking at equilibrium choices they find that, when liquidity is expensive, the two-stream system is more efficient than the vanilla RTGS system without an LSM. This is because the LSM achieves better co-ordination of payments, without introducing settlement risk.