Abstract
Banks and financial market infrastructures (FMIs) that are not able to fulfill their paymentobligations can be a source of financial instability. This paper develops a composite risk indicator toevaluate the criticality of participants in a large value payment system network, combiningliquidity risk and interconnections in one approach, and applying this to the TARGET2payment system. Findings suggest that the most critical participants in TARGET2 are otherpayment systems, because of the size of underlying payment flows. Some banks may becritical, but this is mainly due to their interconnectedness with other TARGET2 participants.Central counterparties and central securities depositories are less critical. These findings can beused in financial stability analysis, and feed into central bank policies on payment system access,oversight, and crisis management.
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