Liquidity Risk in the Payment Systems of China

Abstract

This paper empirically analyses the interbank payment flows of real-time gross settlement systems (RTGS) of China using BoF-PSS2 simulator which is developed by Bank of Finland, and studies the relationship between required reserve ratio and liquidity requirement of payment systems, as well as the effects on liquidity requirement and system efficiency by introducing optimization algorithms to payment systems, and finally brings forward new framework of managing liquidity risk in payment systems. Empirical evidences show that participants of payment systems face more and more liquidity requirement pressure with the increase of required reserve ratio. In addition, optimization algorithms can reduce participants' liquidity requirement and enhance system efficiency. The introduction of optimization algorithms and application of new framework are both effective ways to manage liquidity risk in payment systems.