Collateral Posting Decisions in CHAPS Sterling

The smooth functioning of payment systems, and in particular large-value payment systems, is important in maintaining financial stability.
Published on 02 November 2004

CHAPS Sterling is one such system. CHAPS Sterling appears likely to be robust in the event of operational incidents that temporarily prevent a member bank from making payments, because member banks post more collateral with the Bank of England than they generally need to support their payment activities. This article explores why member banks do this. If the cost of being unable to make a payment is high relative to the cost of posting collateral, one would expect banks to post collateral on the basis of possible peak demand and the cost of so doing not to play an important role in the decision. The empirical evidence presented in this article is consistent with this explanation.

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