Liquidity-saving mechanisms in collateral-based RTGS payment systems

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 17 May 2010

Working Paper No. 389
By Marius Jurgilas and Antoine Martin 

This paper studies banks’ incentives regarding the timing of payment submissions in a collateral-based RTGS payment system and how these incentives change with the introduction of a liquidity-saving mechanism (LSM). We show that an LSM allows banks to economise on collateral while also providing incentives to submit payments earlier. This is because in our model an LSM allows payments to be matched and offset in real time without any or very minimal funds. Under a collateral-based RTGS payment system, introduction of the LSM always improves welfare. The result contrasts with earlier work, which shows that under a fee-based RTGS system, the introduction of an LSM in some circumstances may reduce welfare.

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