An Economic Analysis of Liquidity-Saving Mechanisms

arge-value payments systems, used by banks to settle financial and commercial transactions, play a key role in the financial system. The importance of these payments systems can be illustrated by the large amounts they settle. Every year in the United States, the systems process value equal to approximately 100 times GDP. Innovations in the design of large-value payments systems have led to many improvements in their operations. For example, over the last twenty years, many countries have adopted real-time gross settlement (RTGS) systems for their large-value payments. In an RTGS system, each payment is settled individually, on a gross basis, at the time the payment is sent. RTGS systems offer many advantages—for instance, they limit the risk exposure of payments system participants and allow for rapid final settlement of payments during the day. However, RTGS systems require large amounts of central bank balances to function smoothly. More recent innovations have occurred in the design and implementation of various liquidity-saving mechanisms (LSMs) that are used in conjunction with RTGS systems.1 An LSM gives participants in the payments system an additional option not offered by RTGS alone: A payment can be put into a queue and then released from the queue if some prespecified event occurs. Such mechanisms can reduce the amount of central bank balances necessary to operate the system smoothly as well as quicken the settlement of payments.