Authors: Morten L. Bech, Antoine Martin, and James McAndrews

• The U.S. dollar clearing and settlement system received little attention during the recent financial crisis, mainly because it performed reliably, processing record volumes and values of trades executed in stressed financial markets.
  
  
• Under the smooth surface, though, the system experienced important changes during the crisis.
  
  
• A study of Federal Reserve monetary policy actions aimed at providing liquidity and stability to the financial system during and after the financial crisis concludes that the actions had a major effect on settlement liquidity and thus on the efficiency of clearing and settlement activity.
  
  
• The actions led to a substantial decrease in daylight overdrafts extended by the Federal Reserve and a quickening of settlement relative to the precrisis period.
  
  
• The reduction in overdrafts lowered the Fed’s credit risk while the earlier settlement time suggested significant efficiency gains and diminished operational risk.
  
  
• Over time, the Federal Reserve has sought ways to bring forward settlement times and reduce its credit risk. While the Fed’s monetary policy actions during the crisis were not aimed at improving the functioning of the payment system, they did much to achieve these goals.
  
  
• Because the amount of reserves available to the banking system and the “opportunity cost” of holding such reserves are at the center of any framework for implementing monetary policy, the recent experience offers important policy lessons going forward.
  
  

Morten L. Bech is a senior economist at the Bank for International Settlements; Antoine Martin is an assistant vice president and James McAndrews an executive vice president and the director of financial research at the Federal Reserve Bank of New York.

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