infonet-economy

This paper analyses the liquidity management game played in payment systems with free but collateralised intraday credit facilities, under the assumption that settlement risk is the driving force. Settlement equilibria are found to depend on the combination of the intraday liquidity facilities' design and the collateral policy applied by the central bank. The effectiveness of a two-part tariff in coordinating on early settlement depends on the same factors. Model predictions are consistent with stylised facts from a comparison of settlement behaviour in the Swiss Interbank Clearing and Fedwire funds.