The Federal Reserve Bank of New York today released An Economic Analysis of Liquidity-Saving Mechanisms—a new forthcoming article in the Bank’s Economic Policy Review series.
Authors Antoine Martin and James McAndrews analyze the performance of real-time gross settlement (RTGS) systems with and without the addition of a recent innovation known as a liquidity-saving mechanism, or LSM.
The authors explain that LSMs are automated tools used in conjunction with large-value payments systems known as RTGS systems. LSMs give system participants, such as banks, an option not offered by RTGS alone: they can queue their outgoing payments. Queued payments are released if some prespecified event occurs. LSMs can reduce the amount of central bank balances needed to operate a payments system as well as quicken settlement.
Martin and McAndrews find that in terms of settling payments early, the addition of an LSM typically improves RTGS performance compared with that of a pure RTGS system. However, there are times when traditional RTGS systems can be preferable, such as when many banks that send payments early in RTGS choose to queue their payments when an LSM is available.
Antoine Martin is a research officer and James McAndrews a senior vice president at the Federal Reserve Bank of New York.