The impact of de-tiering in the United Kingdom's large-value payment system

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 08 September 2017

Working Paper No. 676
By Evangelos Benos, Gerardo Ferrara and Pedro Gurrola-Perez

Large-value payment systems (LVPS) often have a tiered structure where only a limited number of banks have direct access to these systems and every other institution accesses the system through agency arrangements with the direct participants. As such, a high degree of tiering is often perceived as being associated with credit and operational risks. In this paper we use data around five recent de-tiering events in the United Kingdom’s LVPS (CHAPS), to assess the impact of de-tiering on these risks as well as on liquidity usage. We find that the impact of de-tiering is largest on credit risk, where average intraday exposures between first and second-tier banks drop by anywhere between £0.3 billion and £1.5 billion per bank, while the cost of insuring against losses arising from these exposures drops by about £4 million to £19 million per bank, per year. On the other hand, the impact of these de-tiering events on operational risk and liquidity usage appears to be economically small.

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