Liquidity-Saving Mechanisms In Collateral-Based RTGS Payment Systems

Date Added: Jun 2010
Format: PDF

This paper studies banks' incentives regarding the timing of payment submissions in a collateral-based RTGS payment system and how these incentives change with the introduction of a Liquidity-Saving Mechanism (LSM). The authors show that an LSM allows banks to economize on collateral while also providing incentives to submit payments earlier. This is because in the model an LSM allows payments to be matched and offset in real time without any or very minimal funds. Under a collateral-based RTGS payment system, introduction of the LSM always improves welfare. The result contrasts with earlier work, which shows that under a fee-based RTGS system, the introduction of an LSM in some circumstances may reduce welfare.