Abstract
We study the impact of the global financial crisis on CHAPS, the United Kingdom’s large value payments system, over the period 2006-2009. Core infrastructures functioned smoothly throughout the crisis and settlement banks continued to meet their payment obligations. However, payments data show that in the two months following the Lehman Brothers failure, banks did, on average, make payments at a slower pace than before the failure. We show that this slowdown is related to concerns about counterparty default risk, thereby identifying a new channel through which counterparty risk manifests itself in financial markets.
Highlights
During the intense period of financial turmoil in the wake of the Lehman Brothers default, infrastructures used by banks to make payments to one another held up well
Disruption did not materialise, it is imperative, given the crucial importance of payment systems, to understand whether and to what extent heightened uncertainty about the solvency of banks worldwide impacted the behavior of banks operating within these systems and whether changes in behavior led to elevated risks
In this paper we study the behavior of banks operating in CHAPS (Clearing House Automated Payment System), the United Kingdom’s large-value wholesale system for unsecured payments
Summary
During the intense period of financial turmoil in the wake of the Lehman Brothers default, infrastructures used by banks to make payments to one another held up well. In this paper we study the behavior of banks operating in CHAPS (Clearing House Automated Payment System), the United Kingdom’s large-value wholesale system for unsecured payments. This is the system through which qualified private banks — called settlement banks — fulfill customer obligations and engage in their own money market activity. Typical payments can be related to financial market transactions, the sterling leg of foreign exchange trades, and UK house purchases. Some of these payments, such as foreign exchange transactions, are very time sensitive and must be executed immediately.. Some of these payments, such as foreign exchange transactions, are very time sensitive and must be executed immediately. For most payments, the bank has some discretion in terms of when it chooses to process the payment
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