Controlling Risk in Payment Systems

Abstract

The significant growth in the volume of trade on the large value interbank payment systems and the concomitant massive increase in intraday overdrafts have raised serious concerns about the ability of existing payment systems to allow central banks to cope with wide scale disturbances and to provide proper incentives for private institutions. This paper studies whether these concerns are warranted and emphasizes the inadequacy of the compartmentalization of research done on prudential rules and payment systems. It develops an analytical framework in which the various conceivable payment systems can be studied. The analytical framework suggests the possibility of safeguarding the flexibility of interbank mutual overdraft facilities while improving current systems through three measures: i) a reinterpretation of bilateral debit caps as bilateral credit lines, so as to escape the rigidity of the "double coincidence of wants", ii) the use of a broader definition of mutual overdraft facilities encompassing other forms of short-term lending between banks, and iii) a centralization of the bilateral credit lines and transactions in a gross payment system, so as to allow the central bank to better monitor positions and to avoid being forced to intervene to prevent systemic risk.

JEL Classification: G21