System design and sources of credit risk in large-value payment and settlement systems

Abstract

Abstract The focus of this chapter is credit risk in payment and settlement systems. We begin with a discussion of how the design of a large-value system might affect the propensity for unintended credit-risk exposures to arise between participants. Two basic settlement models are typically applied in interbank payment systems: deferred net settlement (DNS); and real-time gross settlement (RTGS). Netting allows users to economize on the liquidity required to complete settlement, but may give rise to the build-up of interbank credit exposures during the interval prior to settlement. In an RTGS design, on the other hand, payments are settled gross and in real time, leaving no scope for interbank exposures to accumulate within the system. Liquidity demands will, however, tend to be higher.