Abstract
This chapter analyzes alternative policy approaches to managing payment and network risks in large-dollar payment and settlement systems. The focus is on systemic risk, that is, the risk that a failure by an individual institution to meet its commitments in funds transfers will generate a chain of failures among other institutions. It is clear that the risk of systemic failure is not independent of the risk of failure by individual participants in a payment network. Indeed, systemic failures derive from the failure of individual institutional participants. In turn, the payment failure of a participating financial institution may occur because one or more of its deposit or loan customers fail to meet their payment commitments (Smoot 1985; Stevens 1984; Rosborough and Urkowitz 1983; Mengle 1985; Mengle, Humphrey, and Summers 1987).
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