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Title:Systemic risk and liquidity in payment systems PDF Logo
Authors:Afonso, Gara M.
Shin, Hyun Song
Issue Date:2008
Series/Report no.:Staff Report, Federal Reserve Bank of New York 352
Abstract:We study liquidity and systemic risk in high-value payment systems. Flows in high-value systems are characterized by high velocity, meaning that the total amount paid and received is high relative to the stock of reserves. In such systems, banks rely heavily on incoming funds to finance outgoing payments, necessitating a high degree of coordination and synchronization. We use lattice-theoretic methods to solve for the unique fixed point of an equilibrium mapping and conduct comparative statics analyses on changes to the environment. We find that banks attempting to conserve liquidity cause an increase in the demand for intraday credit and, ultimately, a disruption of payments. Additionally, we find that when a bank is identified as vulnerable to failure and other banks choose to cancel payments to that bank, there are systemic repercussions for the whole financial system.
Subjects:Systemic risk
financial networks
high-value payment systems
precautionary demand
JEL:E58
G21
D85
E44
Document Type:Working Paper
Appears in Collections:Staff Reports, Federal Reserve Bank of New York

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