Real-time Gross Settlement Systems Research Articles

Using synthetic data to evaluate the impact of RTGS on systemic risk in the Australian payments system

This paper develops a new methodology for allowing researchers outside central banks to test the extent of payment system risk, and applies this methodology to an investigation of the impact that the introduction of real time gross settlement (RTGS) had on systemic risk in the Australian payments system. System-specific ratios are first developed to extract bilateral payment obligations from aggregate payments data in the Australian RTGS system. This synthetic data is then used to generate a deferred net settlement (DNS) system of similar dimensions to those the Australian system would have had, had RTGS not been introduced. Standard default simulation methodology is then applied to test the levels of systemic risk in both this system and the corresponding RTGS system to ascertain the degree to which the introduction of RTGS is likely to have reduced the level of risk. We find that while the level of systemic risk is likely to have been reduced in the Australian case, the size of the effect is small, a finding consistent with the results of payments system studies in other countries.

An Economic Analysis of Liquidity-Saving Mechanisms

A recent innovation in large-value payments systems has been the design and implementation of liquidity-saving mechanisms (LSMs), tools used in conjunction with real-time gross settlement (RTGS) systems. LSMs give system participants, such as banks, an option not offered by RTGS alone: they can queue their outgoing payments. Queued payments are released if some prespecified event occurs. LSMs can reduce the amount of central bank balances necessary to operate a payments system as well as quicken settlement. This article analyzes the performance of RTGS systems with and without the addition of an LSM. The authors find that, in terms of settling payments early, these mechanisms typically outperform pure RTGS systems. However, there are times when RTGS systems can be preferable to LSMs, such as when many banks that send payments early in RTGS choose to queue their payments when an LSM is available. The authors also show that the design of a liquidity-saving mechanism has important implications for the welfare of system participants, even in the absence of payment netting. In particular, the parameters specified determine whether the addition of an LSM increases or decreases welfare.

Intraday Liquidity Management: A Tale of Games Banks Play

Over last few decades, most central banks, concerned about settlement risks inherent in payment netting systems, have implemented real-time gross settlement (RTGS) systems. Although RTGS systems can significantly reduce settlement risk, they require greater liquidity to smooth nonsynchronized payment flows. Thus, central banks typically provide intraday credit to member banks, either as collateralized credit or priced credit. Because intraday credit is costly for banks, how intraday liquidity is managed has become a competitive parameter in commercial banking and a policy concern of central banks. This article uses a game-theoretical framework to analyze intraday liquidity management behavior of banks in an RTGS setting. The games played by banks depend on intraday credit policy of central bank and encompass two well-known paradigms in game theory: the prisoner's dilemma and the stag hunt. The former strategy arises in a collateralized credit regime, where banks have an incentive to delay payments if intraday credit is expensive, an outcome that is socially inefficient. The latter strategy occurs in a priced credit regime, where postponement of payments can be socially efficient under certain circumstances. The author also discusses how several extensions of framework affect results, such as settlement risk, incomplete information, heterogeneity, and repeated play.

Liquidity Risk in the Payment Systems of China

This paper empirically analyses the interbank payment flows of real-time gross settlement systems (RTGS) of China using BoF-PSS2 simulator which is developed by Bank of Finland, and studies the relationship between required reserve ratio and liquidity requirement of payment systems, as well as the effects on liquidity requirement and system efficiency by introducing optimization algorithms to payment systems, and finally brings forward new framework of managing liquidity risk in payment systems. Empirical evidences show that participants of payment systems face more and more liquidity requirement pressure with the increase of required reserve ratio. In addition, optimization algorithms can reduce participants' liquidity requirement and enhance system efficiency. The introduction of optimization algorithms and application of new framework are both effective ways to manage liquidity risk in payment systems.

Technology Diffusion within Central Banking: The Case of Real-Time Gross Settlement

We examine the diffusion of real-time gross settlement (RTGS) technology across all 174 central banks. RTGS reduces settlement risk and facilitates financial innovation in the settlement of foreign exchange trades. In 1985, only three central banks had implemented RTGS systems, and by year-end 2005, that number had increased to ninety. We find that the RTGS diffusion process is consistent with the standard S-curve prediction. Real GDP per capita, the relative price of capital, and trade patterns explain a significant part of the cross-country variation in RTGS adoption. These determinants are remarkably similar to those that seem to drive the cross-country adoption patterns of other technologies.

Settlement Finality as a Public Good in Large-Value Payment Systems

Target is a real time gross settlement (RTGS) large value payment network operated by European central banks that eliminates systemic risk. Euro1 is a privately operated delayed net settlement (DNS) network that reduces substantially systemic risk but does not eliminate it. This difference makes RTGS networks more expensive to users even if both networks had the same unit operating costs. This provides an incentive for users to shift payments to the more risky network in normal times and back to Target in times of financial market disruption. The estimated extra cost to a DNS network from posting collateral sufficient to cover all exposures (and eliminate systemic risk) is from 15 to 42 cents per transaction. If full cost recovery on an RTGS system were reduced by this amount, user collateral costs but not risks would be equalized between networks. Full collateralization on DNS networks equalizes both user costs and risks.

The Choice Among Interbank Settlement Systems: The European Experience

This paper addresses the choice of banks between alternative channels for interbank payments. The conventional view assumes a tradeoff between the safety of real‐time gross settlement (RTGS) and the liquidity savings of multilateral netting. Moreover, correspondent banking is believed to be inefficient, both in terms of liquidity and of administrative costs. In the last decade, however, the impulse of the Committee on Payment and Settlement Systems, technological changes and the management of RTGS systems by central banks have reduced the difference between the various systems. This is especially true for risk, whereas liquidity cost crucially depends on the refinancing policy adopted by the central bank and the co‐ordination among the participants. On the basis of the recent evolution of payment systems in Europe, we verify the importance of liquidity, as well as other variables like transaction costs, for the choice of banks among different settlement systems. Cost factors imply that the nature of payments flows (value, commercial versus financial) and some structural features of the banking systems (dimension of the intermediaries, concentration of the banking sector) become important. The analysis is carried out both through a theoretical model and a cross‐country comparison based on three data sources: ECB (European Central Bank, EBA (Euro Banking Association) and SWIFT (Society for Worldwide Interbank Financial Telecommunication).

Which TARGET for monetary policy in stage three? Issues in the shaping of the European payment system

Which TARGET for Monetary Policy in Stage Three? Issues in the Shaping of the European Payment System. — The paper explores the inter-relationship between payment system arrangements and the conduct of the single monetary policy in Stage Three of EMU against the background of TARGET — the project drafted by the European Monetary Institute with the aim of creating an EU-wide payment system through interlinking national Real-Time Gross Settlement (RTGS) systems. In addition to the issues raised by the coexistence of gross and net settlement arrangements, the spread of RTGS systems is likely to involve an increase in the demand for intraday liquidity. The alternative options available to meet this demand are analyzed, focusing on their monetary policy implications and drawing policy prescriptions.

Comment on Controlling Risk in Payment Systems

I am enthusiastic about the paper Controlling Risk in Payment Systems by Jean-Charles Rochet and Jean Tirole. Notably, the authors identify and begin to address the issue of and interaction between real-time gross settlement (RTGS) and deferred net settlement (DNS) funds transfer systems. They do so in a way that is exceedingly clear and readable. The alternative settlement designs that underlie RTGS and DNS have important implications for the structure and organization of national payment systems, including implications for the operational role of central banks. The question of the respective roles of the central bank versus private settlement organizations (clearinghouses) is of immediate interest in countries like Japan and the United States, where RTGS and DNS systems have operated side by side for some time. The question is also important in other developed and in developing financial economies, which are now sorting out issues related to the design of national arrangements for interbank settlement. The purpose of this note is to review the Rochet and Tirole analysis from a practitioner's standpoint, drawing on real life to help develop further the reasoning that has been started. It is hoped that this review will provide the basis for further analysis that is even more relevant for public policy. My comments are in four parts. First, I underscore the importance of the issue concerning coexistence of and interaction between the RTGS and DNS design alternatives for the organization of national payment systems. Second, I attempt to clarify the institutional framework that is relied upon to examine the issue. Third, I identify additional factors that should be taken into account when examining choices and trade-offs between RTGS and DNS, in order to make the analysis more relevant. Finally, I suggest some questions in addition to those already posed by Rochet and Tirole, to help direct future public policy analysis.