Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/100745
Authors: 
Kahn, Charles M.
Roberds, William
Year of Publication: 
1996
Series/Report no.: 
Working Paper, Federal Reserve Bank of Atlanta 96-10
Abstract: 
In this paper we consider the relative merits of net versus gross settlement of interbank payments. Net settlement economizes on the costs of holding non-interest-bearing reserves but increases moral hazard problems. The "put option" value of default under net settlement can also distort banks' investment incentives. ; Absent these distortions, net settlement dominates gross, although the optimal net settlement scheme may involve a positive probability of default. Net settlement becomes more attractive relative to gross settlement if bank assets have to be liquidated at less than book value.
Subjects: 
Financial institutions
Financial services industry
Payment systems
Document Type: 
Working Paper

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