Risk monitoring in Ecuador's payment system: Implementation of a network topology study

Abstract

Payment systems are fundamental pillars of countries’ economic stability and financial systems. Central banks use them to promote safe and efficient electronic payments. As such, central banks have developed various tools to control and monitor inherent risks such as systemic risk, liquidity risks or operational risks that could affect one or more members of the system, and thus affect the payment chain of a given country. Our objective is to present a network topology methodology as a tool to study the characteristics and properties of the Interbank Payment System (SPI) in Ecuador. We establish systemically important players to determine whether their absence in simulated scenarios would cause financial contagion to the rest of the participants in the SPI. We have applied our network topology tool to detect systemic risk in the SPI during the period of the SARS-COV-2 pandemic in 2020. We found that the SPI payment network is sensitive to the absence of its systemically important participants, as well as to exogenous events such as the pandemic, due to which a loss of network stability (payment execution delinquency) arises. This paper constitutes a first application of the network topology for the Ecuadorian case, and at the same time a tool for preventive or corrective policymaking on disruptions in the SPI payment system.