Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/152942
Authors: 
Galos, Peter
Soramäki, Kimmo
Year of Publication: 
2005
Series/Report no.: 
ECB Working Paper 508
Abstract: 
The paper analyses the consequences of an isolated, sudden and unexpected failure of a bank in alternative interbank payment system designs. We assess the exposures and the contagion by a counterfactual analysis assuming that payments currently settled by the pan-European large-value payment system, TARGET, are settled in alternative payment systems: an unsecured end-of-day net settlement system and a secured net settlement system with limits on intraday credit, with collateral and loss-sharing. The results indicate that systemic consequences of one bank's failure on the solvency of other banks can be rather low. If risk management techniques such as legal certainty for multilateral netting, limits on exposures, collateralisation and loss sharing are introduced, the systemic consequences can be mitigated to a high degree. How, and under which circumstances the analyzed failures would render other banks illiquid to meet their payment obligations is outside the scope of the paper.
Subjects: 
Contagion
payment systems
systemic risk
TARGET
JEL: 
E42
G21
Document Type: 
Working Paper

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