The Federal Reserve Bank of New York today released The Timing and Funding of CHAPS Sterling Payments—a new forthcoming article in the Bank’s Economic Policy Review series.
Authors Christopher Becher, Marco Galbiati and Merxe Tudela examine the availability of intraday liquidity to participants in real-time gross settlement (RTGS) systems, particularly CHAPS Sterling, and the factors influencing the timing and funding of payments. They investigate the ability to use incoming payments as a funding source, a process known as liquidity recycling.
Participants in RTGS systems face a trade-off between the cost of liquidity (usually in the form of an overdraft fee or the opportunity cost of collateral posted with the central bank) and the expected cost of delaying payments (usually in the form of financial penalties or reputational risk). Liquidity recycling may help to reduce the costs of intraday liquidity, although the authors note that in CHAPS Sterling the extent to which individual banks benefit varies considerably. The efficiency with which incoming funds are recycled will depend on the extent to which participants collectively maintain the flow of liquidity through the system, perhaps via proactive payment coordination.
Becher, Galbiati, and Tudela conclude that the degree of liquidity recycling supporting CHAPS Sterling payments appears to be high yet stable throughout the day, a condition they attribute to several features of the system. These include centralized coordination devices such as the tendency to settle time-critical payments early in the day, as enforced by a set of throughput guidelines. In addition, the relatively small direct membership of CHAPS Sterling allows for other forms of decentralized coordination between members. For example, the high visibility of payment flows allows members to monitor their bilateral positions and to take action if counterparties fail to make payments in a timely fashion.
Christopher Becher, a policy officer at the European Commission, was an analyst at the Bank of England at the time this article was written. Marco Galbiati is an economist and Merxe Tudela a senior economist at the Bank of England.