A Model of Tiered Settlement Networks

James Chapman · Jonathan Chiu · Miguel Molico

17 citations0/0 files storedJournal of money credit and banking

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Banking stability, regulation, efficiency Global Financial Crisis and Policies Economic theories and models

Abstract

Payment and settlement networks typically involve various tiers of intermediation. This paper develops a model of settlement system to study the endogenous structure of tiered settlement networks, and the welfare consequences of clearing agent (CA) failure. We offer two explanations for tiering: private information regarding participant’s credit worthiness and economies of scale in the participation in the settlement system. CAs play a monitoring and cost‐saving role in the settlement network. As a result, a failure of a CA can lead to a large and persistent welfare loss to the economy.

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References

1991Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt 1989Reputation Acquisition in Debt Markets 2006Repeated Games and Reputations 2001Who Wants a Good Reputation?1999Inside and Outside Money as Alternative Media of Exchange 2008Why pay? An introduction to payments economics 1996The Payments System, Liquidity, and Rediscounting 2009Payments Settlement: Tiering in Private and Public Systems

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