No. 193 - On the Economics of Interbank Payment Systems

by Paolo Angelini and Curzio Giannini
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The paper addresses some general questions raised by the continuous-time nature of most present-day interbank payment systems. Thanks to technological and organizational improvements, it is now possible for participants in net settlement systems to obtain real-time information on net positions during the day. The main benefits, in terms of improved cash management, accrue to the receiving bank and its customers. However, settlement and systemic risks may increase as a result of the availability of intra-day information, if the latter is used by the receiver either to undertake new intra-day transactions through gross systems, which by definition are immediately final, or to enter new binding commitments. The secular decline in the interval between consecutive settlements is also explained on the basis of additional risks that larger volumes and faster payment procedures entail. Highly developed financial markets tend to increase the relative attractiveness of gross settlement systems, in which the settlement lag is zero. As to their organization, we argue that due to externalities, a purely decentralized equilibrium entails a suboptimal (low) level of reserves; this may explain some of the problems experienced by existing gross systems.

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  1. 31 May 1993
    No. 193 - On the Economics of Interbank Payment Systems
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