Economic Policy Review Executive Summary

An Economic Analysis of Liquidity-Saving Mechanisms

Recapping an article from the September 2008 issue
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of the Economic Policy Review, Volume 14, Number 2
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15 pages / 864 kb

Authors: Antoine Martin and James McAndrews

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Index of executive summaries
  • A recent innovation in large-value payments systems has been the design and implementation of liquidity-saving mechanisms, or LSMs.

  • LSMs are queuing arrangements for payments that operate alongside traditional real-time gross settlement (RTGS) systems.

  • The mechanisms give system participants, such as banks, an option not offered by RTGS alone: participants can condition the release of queued payments on the receipt of offsetting or partially offsetting payments.

  • LSMs can reduce the amount of central bank balances needed to operate a payments system as well as quicken settlement, as banks are less inclined to delay their sending of payments.

  • Martin and McAndrews analyze the performance of RTGS systems with and without the addition of a liquidity-saving mechanism.

  • The study finds that these mechanisms typically perform better than traditional RTGS systems when it comes to settling payments early.

  • However, there are times when RTGS systems can be preferable to LSMs, such as when many banks that send payments early in RTGS choose to queue their payments when an LSM is available.

  • The authors also show that the design of an LSM has important implications for the welfare of system participants, even in the absence of payment netting. In particular, the parameters specified in the design determine whether the addition of a liquidity-saving mechanism increases or decreases welfare.


About the Authors

Antoine Martin is a research officer and James McAndrews a senior vice president at the Federal Reserve Bank of New York.

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The views expressed in this summary are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.