Settlement Liquidity and Monetary Policy Implementation -- Lessons from the Financial Crisis

he U.S. dollar clearing and settlement system was little noticed during the recent financial crisis, mainly because it performed dependably, processing record volumes and values of trades made in stressed financial markets. Its successful operation was in part a result of the collaborative efforts undertaken by stakeholders over decades to improve risk management and operational resiliency. Under the smooth surface, though, the dollar clearing and settlement system experienced important changes during the crisis. This article focuses on the ease with which market participants can discharge their payment and settlement obligations. We denote this as settlement liquidity. Our main interest is on the settlement liquidity of the Federal Reserve’s Fedwire Funds Service, the major large-value payment system in the United States. We discuss how to measure settlement liquidity, and document the evolution of some of its key drivers over time. In particular, we show how the policy measures aimed at achieving financial and economic stability during and after the financial crisis have had a major impact on settlement