Abstract
Large-value payment systems (LVPSs) often have a tiered structure, whereby only a limited number of banks have direct access to these systems, while every other institution accesses it through agency arrangements with direct participants. As such, a high degree of tiering is often perceived as being associated with credit and operational risks. In this paper, we use data around five recent de-tiering events in the United Kingdom’s LVPS (Clearing House Automated Payment System) to assess the impact of de-tiering on these risks as well as on liquidity usage. We find that the impact of de-tiering is largest on credit risk, where average intraday exposures between first- and second-tier banks drop by anywhere between £0.3 billion and £1.5 billion per bank, while the cost of insuring against the losses arising from these exposures drops by £4 million to £19 million per bank, per year. Nevertheless, the impact of these de-tiering events on operational risk and liquidity usage appears to be economically small.
Highlights
Large-value payment systems (LVPSs) often have a tiered structure, whereby a limited number of banks have direct access to these systems and act as correspondents for every other institution wishing to make or receive a payment
Our paper is related to previous studies that have sought to explain the economic rationale of tiering in LVPSs and analyze its effects on credit risk and liquidity usage
We define and calculate the metrics of credit, liquidity and operational risks associated with tiering and study the impact that the five de-tiering events had on the magnitude of these risks
Summary
Large-value payment systems (LVPSs) often have a tiered structure, whereby a limited number of (first-tier) banks have direct access to these systems and act as correspondents for every other (second-tier) institution wishing to make or receive a payment (see Figure 1). The United Kingdom’s Clearing House Automated Payment System (CHAPS) is the most tiered system, while Switzerland’s SIC and Japan’s BOJ-NET are the least tiered, with all participating banks having direct access to them. This variation in tiering across payment systems is partly due to historical reasons, but it may reflect participation costs or other economic incentives along with regulatory mandates.
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