Paper #176

Title:

Contagion and efficiency in gross and net interbank payment systems

Authors:

Xavier Freixas and Bruno Parigi

Date:

March 1996 (Revised: June 1996)

Abstract:

The increased fragility of the banking industry has generated growing concern about the risks associated with the payment systems. Although in most industrial countries different interbank payment systems coexist, little is really known about their propierties in terms of risk and efficiency. We tackle this question by comparing the two main types of payment systems, gross and net, in a framework where uncertainty arises from several sources: the time of consumption, the location of consumption and the return on investment. Payments across locations can be made either by directly transferrring liquidity or by transferring claims against the bank in the other location. The two mechanism are interpreted as the gross and net settlement systems in interbank payments. We characterize the equilibria in the two systems and identify the trade-off in terms of safety and efficiency.

Keywords:

Payment systems, netting, contagion

JEL codes:

G21, E51

Area of Research:

Finance and Accounting

Published in:

Journal of Financial Intermediation, 7, 1, (1998), pp. 3-31, (1998)

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