Which Bank Is The "Central" Bank?: An Application Of Markov Theory To The Canadian Large Value Transfer System

In a modern financial system the importance of a given institution depends on both its individual characteristics as well as the nature of its relationships with other financial institutions. In this paper the authors examine the network defined by the credit controls in the Canadian Large Value Transfer System (LVTS). The authors provide a ranking with respect to the predicted liquidity holdings and define these liquidity holdings as functions of the network structure defined by the credit controls in LVTS. An institution is deemed most important if, based on the network analysis; it is predicted to hold the most liquidity. In addition the authors provide a unique measure of how fast an institution is in terms of processing its payments.