Working Paper No. 451
By Evangelos Benos, Rodney Garratt and Peter Zimmerman
We use payments data for the period 2006-09 to study the impact of the global financial crisis on payment patterns in CHAPS, the United Kingdom’s large-value wholesale payments system. CHAPS functioned smoothly throughout the crisis and all CHAPS settlement banks continued to meet their payment obligations. However, the data show that in the two months following the Lehman Brothers failure, banks did, on average, make payments at a slower pace than before the failure. Our analysis suggests this was partly explained by concerns about counterparty default risk as well as system-wide risk. The ratio of payments made to liquidity used was 30% lower in the period from 15 September 2008 to 30 September 2009 than in the period preceding the default of Lehman Brothers. This was due initially to payment delay, but later was due to banks making more payments with their own liquidity, probably because quantitative easing increased the amount of reserves in the system. To assess the economic significance of the observed delays in the value of payments settled, we develop risk indicators, based on Markov models, to quantify the theoretical liquidity impact of delays during an operational outage. We find that payment delays in the months following the failure of Lehman Brothers led to a statistically significant but economically modest increase in these risk measures.