Large-value Payment System Research Articles

The Impact of De-Tiering in the United Kingdom's Large-Value Payment System

Large-value payment systems (LVPS) often have a tiered structure where only a limited number of banks have direct access to these systems and every other institution accesses the system through agency arrangements with the 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(CHAPS), 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 losses arising from these exposures drops by about £4 million to £19 million per bank, per year. On the other hand, the impact of these de-tiering events on operational risk and liquidity usage appears to be economically small.

Liquidity Saving Mechanisms in Payment Systems and Settlement Liquidity

Payment systems are one of the key Financial Market Infrastructures (FMIs) and have showed remarkable progress over the past two decades. The first half of this paper focuses on the evolutionary process of payment systems, starting with the Deferred Net Settlement (DNS) system and progressing to the Real-Time Gross Settlement (RTGS) system. Subsequently, much more sophisticated payment systems have been put in place, which include the “Hybrid System,” and the “RTGS system with Liquidity Saving Mechanism (LSM).” In the latter half of this paper, experience from the “Next-Generation Real-Time Gross Settlement” (RTGS-XG) project of BOJ-NET is discussed. BOJ-NET is the large-value payment system operated by Bank of Japan (BOJ). BOJ-NET, a pure RTGS system, added an LSM in 2008 and became an RTGS system with LSM. The impact of the LSM's introduction is analyzed, which includes the participants' settlement liquidity, the liquidity-saving effect, the average settlement time, the average waiting time in the queue, the turnover ratio, and the volume of idle liquidity. These analyses would be useful for any nations considering the introduction of the same kind of enhanced payment system.

Identifying Interbank Loans, Rates, and Claims Networks from Transactional Data

Our objective is to identify interbank (i.e., non-collateralized) loans between financial institutions from Colombian large-value payment system data by implementing Furfine’s method. After identifying interbank loans from transactional data, we obtain the interbank rates and claims without relying on financial institutions’ reported data. Contrasting identified loans with those consolidated from financial institutions’ reported data suggests the algorithm performs well, and it is robust to changes in its setup. The weighted average rate implicit in transactional data matches local interbank rate benchmarks strictly. From identified loans, we also build the interbank claims network. The three main outputs (i.e., the interbank loans, the rates, and the claims networks) are valuable for examining and monitoring the money market, for contrasting data reported by financial institutions, and as inputs in models of financial contagion and systemic risk.

Money laundering and Greek banking payment and settlement systems

Purpose – The purpose of this paper is to identify, categorize and describe the Greek banking payment and settlement systems and the way to SEPA. Also, the purpose is to describe authorities that supervise money laundering through Greek payment systems and identify major categories of suspicious transaction reports and amounts of criminal assets per each category. Design/methodology/approach – The Bank of Greece, central bank of Greece, has explicit tasks in the field of payment and settlement systems. In Greece, there are three payment and settlement systems: large-value payment system (TARGET2), retail payment systems and securities settlement systems. Findings – TARGET2 is based on a technically centralized platform (single shared platform – SSP), which is provided by the central banks of Germany, France and Italy, and it replaces the decentralized structure of the original TARGET system. Migration on TARGET2 took place in Greece on May 19, 2008. Ongoing cooperation between the European System of Central Banks and the banking community through extensive consultations facilitated the smooth migration to TARGET2. Retail payment systems consist of DIAS credit transfers, direct debits, check, ATM transactions and card payments. During the year 2013, DIAS cleared 144.13 million payment transactions with a total value of €184.1 billion. Most of the transactions were credit transfers SEPA compliant. Securities settlement systems operate on the delivery versus payment principle, whereby sales of securities and respective payments are affected simultaneously, as well as the principle of dual notice. Migration of Greek data systems toward SEPA through a regulatory framework will promote the use of common European standards and business practices for a fully automated and efficient processing of payment instruments. Bank of Greece and Greek Anti-Money Laundering and Counter Terrorist Financing Authority are responsible authorities to supervise illegal activity through bank payment systems. Data show that Greek bank payment systems were used during 2012 for tax evasion and for offences that result in imprisonment for over six months. Practical implications – Above findings are useful for information technology management, legislative and compliance authorities, investors and person that operate transactions with Greek banking payment and settlement systems. Originality/value – To the best of the author’s knowledge, it is the first study about Greek banking payment systems.

Reaction functions of the participants in Colombia’s large-value payment system

Large value payment flows can be disrupted by several types of failures such as operational incidents, problems experienced by the administrator of the payments settlement system, outages in the communications networks and the inability of a participant to submit payments due to insufficient liquidity. During any of these incidents, the participants of the system can either decide to stop, delay or continue sending payment orders, which fundamentally depends on the elements that originated the disruption, as well as on the alternative liquidity sources available to each entity. By means of Tobit models with random effects we evaluated the payments activity of Colombian financial institutions. Our results suggest that participants’ reaction vary in accordance with the type of incident, along with the type of entity and its role in the market.

Identifying Interbank Loans, Rates, and Claims Networks from Transactional Data

We identify interbank (i.e. non-collateralized) loans from the Colombian large-value payment system by implementing Furfine’s method. After identifying interbank loans from transactional data we obtain the interbank rates and claims without relying on financial institutions’ reported data. Contrasting identified loans with those consolidated from financial institutions’ reported data suggests the algorithm performs well, and it is robust to changes in its setup. The weighted average rate implicit in transactional data matches local interbank rate benchmarks strictly. From identified loans we also build the interbank claims network. The three main outputs (i.e. the interbank loans, the rates, and the claims networks) are valuable for examining and monitoring the money market, for contrasting data reported by financial institutions, and as inputs in models of financial contagion and systemic risk.

Central bank intervention in large-value payment systems: an experimental approach

This experimental study investigates the behavior of banks in a large value payment system. More specifically, we look at 1) the reactions of banks to disruptions in the payment system and 2) the way banks behavior changes to incentives of the central bank. The game used in this experiment is a stylized version of a model of Bech and Garratt (2006) in which each bank can choose between paying in the morning (efficient) or in the afternoon (inefficient) and builds on the game by Abbink et al. (2010). The results show that a positive (bail out) or negative (punishment) incentive steers payments to the inefficient or efficient equilibrium, respectively. In contrast to our expectation, providing detailed information on disruptions steers payments towards the inefficient equilibrium.

Central Bank Intervention in Large Value Payment Systems: An Experimental Approach

This experimental study investigates the behavior of banks in a large value payment system. More specifically, we look at 1) the reactions of banks to disruptions in the payment system and 2) the way banks behavior changes to incentives of the central bank. The game used in this experiment is a stylized version of a model of Bech and Garratt (2006) in which each bank can choose between paying in the morning (efficient) or in the afternoon (inefficient) and builds on the game by Abbink et al. (2010). The results show that a positive (bail out) or negative (punishment) incentive steers payments to the inefficient or efficient equilibrium, respectively. In contrast to our expectation, providing detailed information on disruptions steers payments towards the inefficient equilibrium.

Centrality Measurement of the Mexican Large Value Payments System from the Perspective of Multiplex Networks

With the purpose of going further in the understanding of the payment flows among the participants in the large value payment system in Mexico, SPEI, we elaborate payment networks using historical data for a period of seven years. We conceptualize the SPEI large value payment system as a multiplex network and we study it accordingly. Based on transactions performed on a daily basis, we present three layers built on the following types of payments, i.e. transactions sent from participant to participant, from participant to third party and from third party to third party. We observe that those layers exhibit dissimilar topology: the participant to participant layer reveals the behaviour of banks settling their own obligations, which proved to be sensitive to the failure of Lehmann Brothers; the participant to third party payments layer presented stable properties; and the third party to third party layer resulted in an increasingly dense network since the system has been adopted for the settlement of low-value obligations between accountholders. In order to identify relevant players in those layers, we compare some well-known centrality measures and also a novel centrality measure specifically designed for payment systems, SinkRank. The rankings assigned by SinkRank show a low degree of coincidence across layers.

Variations in Liquidity Provision in Real-Time Payment Systems

We describe methods for measuring liquidity provision that can be applied to real-time gross settlement payment systems. Using data from CHAPS, the UK large-value payment system, we find that smaller banks tend to provide more liquidity than larger banks, relative to their payment flows. We use a Gini coefficient to measure these variations in liquidity provision between banks, and observe that the variations increase following the collapse of Lehman Brothers. It can be difficult to tell whether the variations are intentional or whether they occur due to external factors that are beyond the control of the individual banks. We use a recombinant approach to detect instances where observed patterns of liquidity provision are unlikely to have occurred absent of some behavioural or structural factors, such as differences in banks’ business models. Our results suggest that the variations in liquidity provision are larger than would be expected from truly random payment flows.

Macroo-Prudential Assessment of Colombian Financial Institutionss Systemic Importance

Three metrics are designed to assess Colombian financial institutions’ size, connectedness and non-substitutability as the main drivers of systemic importance: (i) centrality as net borrower in the money market network; (ii) centrality as payments originator in the large-value payment system network, and (iii) asset value of core financial services. Two systemic importance indexes are calculated based on two different aggregation methods for the three metrics: fuzzy logic and principal component analysis. The resulting indexes are complementary and provide a comprehensive relative assessment of each financial institution’s systemic importance in the Colombian case, in which the choice of metrics pursues the macro-prudential perspective of financial stability. They both (i) agree on the skewed (i.e. inhomogeneous) nature of systemic importance and its approximate scale-­free distribution; (ii) on the preeminence of credit institutions as the main contributors to systemic importance, and (iii) on the non-trivial importance of a few non-banking institutions.

Dynamic Visualization of Large Transaction Networks: The Daily Dutch Overnight Money Market

This paper shows how large data sets can be visualized in a dynamic way to support exploratory research, highlight econometric results or provide early warning information. The case studies included in this paper case are based on the payments and unsecured money market transaction data of the Dutch part of the Eurosystem’s large value payment system, TARGET2. We show how animation facilitates analysis at three different levels. First, animation shows how the market macrostructure develops. Second, it enables individual banks that are of interest to be followed. Finally, it facilitates a comparison of the same market at different moments in time and of different markets (such as countries) at the same moment in time.

Systemic Importance Index for Financial Institutions: A Principal Component Analysis Approach

As a result of the most recent global financial crisis, literature has embraced size, connectedness and substitutability as key indicators for financial institutions’ systemic importance. This paper applies Principal Components Analysis to some metrics for assessing size, connectedness and substitutability, where those metrics rely on a combination of balance sheet data and the application of network theory to large-value payment system’s information. The main results are the following: (i) the three concepts and their metrics are explanatory and non-redundant for differentiating financial institutions’ relative systemic importance; (ii) these metrics allow the construction a PCA-based Systemic Importance Index, a valuable tool for financial authorities’ policy and decision-making; and (iii the importance of the too-connected-to-fail criteria and the presence of non-banking firms among the most systemically important financial institutions in the Colombian case are confirmed.

The Role of Counterparty Risk in CHAPS Following the Collapse of Lehman Brothers

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.

Implicit intraday interest rate in the UK unsecured overnight money market

Abstract This paper estimates the intraday value of money implicit in the UK unsecured overnight money market. Using transactions data on overnight loans advanced through the UK large value payments system CHAPS in 2003–2009, we find a positive and economically significant intraday interest rate. While the implicit intraday interest rate is quite small pre-crisis, it increases more than tenfold during the financial crisis of 2007–2009. The key interpretation is that an increase in implicit intraday interest rate reflects the increased opportunity cost of pledging collateral intraday and can be used as an indicator to gauge the stress of the payment system. We obtain qualitatively similar estimates of the intraday interest rate by using quoted intraday bid and offer rates and confirm that our results are not driven by the intraday variation in the bid-ask spread.

Designing an expert-knowledge-based systemic importance index for financial institutions

Defining whether a financial institution is systemically important (or not) is challenging due to: the inevitability of combining complex importance criteria such as institutions' size, connectedness and substitutability; the ambiguity of what an appropriate threshold for those criteria might be; and the involvement of expert knowledge as a key input for combining those criteria. The proposed method, a fuzzy logic inference system, uses four key systemic importance indicators that capture institutions' size, connectedness and substitutability, and a convenient deconstruction of expert knowledge to obtain a systemic importance index; key systemic importance indicators were designed from data from large-value payment systems as well as balance sheets. This method allows combination of dissimilar concepts in a nonlinear, consistent and intuitive manner, while considering them as continuous (nonbinary) functions. Results reveal that the method imitates the way experts themselves think about the decision process regarding what a systemically important financial institution is within the financial system under analysis. The importance index is a comprehensive relative assessment of each financial institution's systemic importance. It may serve financial authorities as a quantitative tool for focusing their attention and resources where the severity resulting from an institution failing or near-failing is estimated to be greatest. It may also serve for enhanced policy-making (eg, prudential regulation, oversight and supervision) and decision-making (eg, resolving, restructuring or providing emergency liquidity).

Implicit Intraday Interest Rate in the UK: Unsecured Overnight Money Market

This paper estimates the intraday value of money implicit in the UK unsecured overnight money market. Using transactions data on overnight loans advanced through the UK large value payments system CHAPS in 2003-2009, we find a positive and economically significant intraday interest rate. While the implicit intraday interest rate is quite small pre-crisis, it increases more than tenfold during the financial crisis of 2007-2009. The key interpretation is that an increase in implicit intraday interest rate reflects the increased opportunity cost of pledging collateral intraday and can be used as an indicator to gauge the stress of the payment system. We obtain qualitatively similar estimates of the intraday interest rate by using quoted intraday bid and offer rates and confirm that our results are not driven by the intraday variation in the bid-ask spread.

Does modern banking lead to money privatization?

Money privatization is seen as one of the main features of modern banking. The development of private payment arrangements and the globalization of banking have indeed led to a growing questioning of central banks' monopoly on the provision of money. This paper analyzes empirically the reality of such a phenomenon and renews the attention on the role of central banks in money creation mechanisms. I adopt a novel approach to determine the weight of private money in modern banking. I first calculate orders of magnitude of the share of transactions made with central bank money in a sample of 15 countries. To investigate the evolution of this variable, I focus on the United States, and I construct new datasets on the total value of transactions in retail and large-value payment systems over the last 40 years. Thanks to this empirical novelty, I get a precise estimate of the share of transactions settled in central bank money (over the total value of transactions) in the US. I then analyze the nature of the assets used for the remaining share of transactions. To do so, I study exhaustively all the arrangements and systems in my sample of countries where settlement potentially involves private money. Empirical evidence questions the existence of a privatization of money and shows the monopoly of central bank money in modern banking.

Measuring free riding in large-value payment systems: the case of TARGET2

This paper addresses the question of how free riding in large-value payment systems should be properly measured. Based on the valuable proposal by Denbee, Garratt and Zimmermann, various measures of free riding in large-value payment systems are investigated. Assessing the measures proposed in the literature against a list of rational postulates for measurement reveals their weaknesses. To overcome these weaknesses, we define three other measures, which are designed to be used for econometric studies and yield results independent of the size, composition and other special features of the payment system. Empirical results for nine important participants in TARGET2-BBK are displayed and compared. It turns out that a combination of at least two measures would be recommended for capturing the various aspects of free riding. The measures reveal some stable payment behavior for most banks over time, but also some remarkable regime shifts that yield interesting insights about single participants. The calculated levels of free riding can be judged to be rather low given the empirical results. In addition, the stable pattern over time raises the question of whether other unobserved features explain the different payment patterns such that labeling as a free rider based purely on measurement would be premature.

Implicit Intraday Interest Rate in the UK Unsecured Overnight Money Market

This paper estimates the intraday value of money implicit in the UK unsecured overnight money market. Using transactions data on overnight loans advanced through the UK large-value payments system (CHAPS) in 2003-09, we find a positive and economically significant intraday interest rate. While the implicit intraday interest rate is quite small pre-crisis, it increases more than tenfold during the financial crisis of 2007-09. The key interpretation is that an increase in the implicit intraday interest rate reflects the increased opportunity cost of pledging collateral intraday and can be used as an indicator to gauge the stress of the payment system. We obtain qualitatively similar estimates of the intraday interest rate using quoted intraday bid and offer rates and confirm that our results are not driven by the intraday variation in the bid-ask spread.