ISSN 1392 – 124X INFORMATION TECHNOLOGY AND CONTROL, 2007, Vol. 36, No. 4




         STUDY OF THE SIMULATION AND OPTIMIZ...
Study of the Simulation and Optimization System of Interbank Settlements



                                          Subs...
D. Bakšys, L. Sakalauskas

payment and settlement system. The Central bank                                              1 ...
Study of the Simulation and Optimization System of Interbank Settlements


point X t with the significance value 1 − µ , i...
D. Bakšys, L. Sakalauskas

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Study of the Simulation and Optimization System of Interbank Settlements

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Study of the Simulation and Optimization System of Interbank Settlements

  1. 1. ISSN 1392 – 124X INFORMATION TECHNOLOGY AND CONTROL, 2007, Vol. 36, No. 4 STUDY OF THE SIMULATION AND OPTIMIZATION SYSTEM OF INTERBANK SETTLEMENTS Donatas Bakšys1, Leonidas Sakalauskas2 1 Kaunas University of Technology Panevėžys Institute Klaipėdos Str. 1, LT-35209 Panevėžys 2 Institute of Mathematics and Informatics Akademijos Str. 4, LT-08663 Vilnius Lithuania Abstract. The aim of this paper is a computer study of the system for simulation and optimization of interbank settlements. The system is based on the Poisson-lognormal model of settlement flow and performs iterative simulation and optimization of expected transaction costs using randomly generated samples of transaction flows. The results of study by Monte-Carlo simulation are given, based on data of the payment and settlement system of the Bank of Lithuania. Keywords: Interbank payments, settlements, modelling of interbank settlements, optimisation of settlement costs. 1. Introduction 2. A description of simulation and optimization system of settlements Active introductions of the means of electronic data transfer in banking and concentration of a great The principal scheme of modelling, simulation, part of settlements at the centres of interbank pay- and optimization of the settlements system should ments were related with the creation of an automated consist of the following parts: system of clearing. The main purpose of such systems • the subsystem of analysis and calibration; is to warrant a fast and rational turnover of settle- ments, to balance payments, and to reduce the move- • the subsystem of simulation and optimization. ment of money supply. These systems should provide In Figure 1, we present the scheme of modelling, the principles of stability, efficiency, and security. simulation and optimisation of the settlements system. Participants of the system must satisfy the require- The data are scanned in the part of statistical ana- ments of liquidity and capital adequacy measures. The lysis. These data are used to calibrate the settlement owner, operator, and supervisor of such a system by model and compute the parameters. The calibration default are the central bank. It installs a request for the procedures are developed on the base of the Poisson- participants of the system, conducts supervision over lognormal model [1]. their performance and takes measures that guarantee a In the part of generating the settlement flow, a stable system operation. fixed number of applications is generated using the The target of this paper is computer study of the generator of random numbers by means of the Pois- system for simulation and optimization of interbank son-lognormal model [1]. In the part of simulation of settlements. The system is based on the Puasson-log- the settlement process the time of transactions are normal model of settlements flow and performs simulated considering the address of applications and iterative simulation and optimization of expected liquidity characteristics. In the subsystem of analyses transaction costs using randomly generated samples of of costs and liquidity, the settlement costs and the transaction flows. The main parts of the system are fixed loss of liquidity are computed. In the part of described by Bakšys and Sakalauskas, 2007 [1]. The optimization, different strategies for management of results of the system study by Monte-Carlo simulation the correspondent account of participants and the cent- are given based on data of the payment and settlement ral bank are explored. In the simulation process a system of the Bank of Lithuania. continuous net settlement system is realized when transactions are booked immediately [3]. 388
  2. 2. Study of the Simulation and Optimization System of Interbank Settlements Subsystem of analysis and calibration Input of flow of settlements Calibration of the settlement Subsystem of simulation and optimisation Generating of settlement flow Simulation of the settlement process of a day Analysis of costs and liquidity of one period Statistical simulation and optimisation of system parameters Figure 1. The system of modelling, simulation, and optimization of settlements 2.1. Modelling and simulation of data • average of the value of one transfer; Let us consider the system consisting of J agents, • standard deviation of one transfer. who execute payments between themselves. We call by agents the participants of a system: banks, foreign 2.2. Simulation of settlement costs bank branches, credit unions, and other financial or A successful performance of the payment system is clearing institution members of the payment and guaranteed by keeping sufficient sums in the corres- settlement system. The participants send applications pondent accounts. The correspondent account of the to the payment and settlement system. Each applica- l th day consists of the correspondent account of the tion is described in the system by the name of a sender, name of the addressee, moment of delivery of previous day, net balance, and the deposited (or with- the application, and the volume of transaction. drawn) amount of asset of the participant himself. Thus, the amount on the correspondent account may The receipt of real data is bound up with a problem be computed as follows: of confidentiality. Usually the institutions which take part in interbanking operations avoid to reveal the data Kil = max(0, Kil −1 + δ il + Gil ) , (1) of transactions. Exceptionally it is possible to receive encoded data. where, δ il is the balance, Kil is the correspondent We consider anonymous data of the interbank account residue, Gil is the deposited or withdrawn settlement session of a typical labour day presented by sum of the bank i for day l [1]. the Bank of Lithuania. These data consist of 74637 applications of J =11 participants of the Payment and Let us analyze how banks can manage settlement Settlement System. The data include the code name costs by depositing (or withdrawing) assets on the (number) of a participant of the payment and settle- correspondent account. We consider the policy when ment system, time of delivery of the applications, banks deposit or withdraw certain fixed sums X i . volume of applications, and the flow of applications. When computing operational costs we have to take Further we use the term “payment” instead of “pay- into consideration that a bank cannot withdraw a sum ment order”, for simplicity. larger than that present in the corresponding account. According to the transaction model used the sys- Thus, after simple considerations, we have that the tem generates flows of moments of bilateral payments deposited or withdrawn amount is as follows: by the Poisson distribution and the corresponding flow of payment volumes according to lognormal distribu-   ( ) Gil = max  X i , − max Kil −1 + δ il −1, 0  .   (2) tion. The primary data were obtained from these data Insufficient sums of the clearing accounts cannot by an imitative model of generation of payments flow: satisfy the credit obligations, because this fact desta- • frequency of submission of applications; bilizes interbank payments and sets gridlocks in the 389
  3. 3. D. Bakšys, L. Sakalauskas payment and settlement system. The Central bank 1 N allows borrowing overnight loans and installs reserve Qi ( X i ) = ∑ ∂ x Di ( X i , δ i,n ) . (8) N n =1 requirements to the settlement system participants in order to prevent the illiquidity in the payment system. Denote the vector of agent impact on its cor- Therefore the Central bank establishes reserve require- respondent account as X = ( X1, K , X J ) . The quality ments RRi for the participants of the settlement sys- of the settlement system can be defined by the general tem. The reserve requirements depend on liabilities of expected cost a participant. J In order to study the policies of credit and liquidity risk control, we consider operational costs of settle- L( X ) = % ∑ Li ( X i ) . % (9) i =1 ments. The total cost of settlements of the i th agent During the simulation the sampling variance can during one period consists of several parts: be computed 1 N ( ) Di = REi + Fi + Bi + TTi + ACi (3) 2 d2 (X ) = ∑ D − L( X ) , n % (10) N N n =1 where REi is the premium for deposit, Fi is the pay J of nonconformity of reserve requirements, Bi is the cost of short-term loans, TTi is the indirect bank where D n = ∑ Di ( X i , δi,n ) , 1 ≤ n ≤ N . i =1 losses due to the freeze of the deposited amount of assets (or possible profit of withdrawal) in the corres- pondent account, and ACi is the operation cost. The 3. Statistical optimisation of settlement costs main parts of the total costs of settlements are We develop a statistical optimization procedure for described by Bakšys and Sakalauskas, 2007 [1] minimizing the costs using the approach of stochastic The payment and settlement system is nonlinear programming by the Monte-Carlo estima- characterised by total settlement costs tors [5]. Let some initial vector of agents deposits D= ∑ J Di , (4) ( X 0 = X 1 , X 2 ,K , X J 0 0 0 ) be given, and a random sample of income and outcome vectors be generated. i =1 Let the initial sample size be N0. Now, the Monte- Let us calculate the average costs of service by Carlo estimators of the gradient of expected costs are simulating a few periods of settlements. computed according to (9). Next, an iterative Denote the cost of transactions during one period stochastic procedure of gradient search could be by Di = Di ( X i , δ i ) , which is a random function in introduced: general, depending on the deposit X i and the vector X t +1 = X t − ρ ⋅ Qi ( X i ) , (11) of balances of the correspondent account where ρ > 0 is a certain step-length multiplier. δ i = (δ i1 , δ i2 , K , δ iT ) . Let us denote the expected cost We choose the sample size at each next iteration during one period by inversely proportional to the square of the gradient Li ( X i ) = EDi ( X i , δ i ) . (5) estimator from the current iteration: Using the formulas of stochastic differentiation n ⋅ Fish(γ , n, N t − n) N t +1 = , (12) [6], we can compute the subgradients ∂ x Di ( X i , δ i ) . ρ ⋅ Q( X t ) ⋅ ( A( X t ))−1 ⋅ (Q( X t )) ' It is easy to make sure that expectation of the sub- gradient of the cost function yields the gradient of where Fish(γ , n, N t − n) is the γ -quintile of the expected costs [4]: Fisher distribution with (n, N t − n) degrees of dLi ( X i ) = E∂ x Di ( X i , δ i ) . (6) freedom. dX i The step length ρ could be chosen experimental- Let N periods of settlement performance be ly. We introduce minimal and maximal values Nmin simulated and random vectors of incomes and and Nmax are to avoid great fluctuations of sample size outcomes δ i,n , 1 ≤ n ≤ N , 1 ≤ i ≤ J , be generated. in iterations. Usually Nmin ~500-1000 and Nmax chosen Thus, the statistical estimate of settlement costs are from the conditions on the permissible confidence the average cost: interval of estimates of the objective function [1]. It is convenient to test the hypothesis of equality to 1 N Li ( X i ) = % ( ∑ D X i , δ i,n . N n =1 i ) (7) zero of the gradient by means of the well-known multidimensional Hotelling T2-statistics [2]. Hence, The Monte-Carlo estimator of gradient (6) is the optimality hypothesis could be accepted for some obtained by virtue of: 390
  4. 4. Study of the Simulation and Optimization System of Interbank Settlements point X t with the significance value 1 − µ , if the fol- 180000 lowing condition is satisfied: 160000 Average of settlements costs 140000 t ( N − n) ⋅ (Q( X )) ⋅ ( A( X )) t t −1 ⋅ (Q( X )) / n ≤ Fish( µ , n, N − n) .(13) t t 120000 Next, we decide that the objective function is 100000 estimated with a permissible accuracy ε , if its confi- 80000 60000 dence bound does not exceed this value: 40000 t t 20000 ηβ ⋅ d Nt ( X ) / N ≤ ε , (14) 0 1 5 9 13 17 21 25 where η β is the β -quintile of the standard normal Number of iteration distribution, and the standard deviation d t is de- N Figure 3. Dependence of the average settlement costs of the fined by (10). Thus, the procedure (11) is iterated 9th participant on the number of iteration adjusting the sample size according to (12) and testing conditions (13) and (14) at each iteration. If the latter 23400 conditions are met at some iteration, then there are no 23200 reasons to reject the hypothesis on the optimality of Average of settlements costs 23000 the current solution. Therefore, there is a basis to stop 22800 the optimization and make a decision on the optimum 22600 finding with a permissible accuracy. If at least one 22400 22200 condition in (13), (14) is violated, then the next 22000 sample is generated and the optimization is continued. 21800 As follows from the previous section, the optimization 21600 should stop after generating a finite number of Monte- 1 5 9 13 17 21 25 Number of iteration Carlo samples. Figure 4. Dependence of the average settlement costs of the 4. Results of simulation and optimization 10th participant on the number of iteration In this section, we present some Monte-Carlo 900000 simulation results, which were obtained using the Average of the total settlements costs proposed model calibrated with respect to real data. 880000 The parameters of the Poisson-lognormal model were 860000 taken from Bakšys and Sakalauskas [1]. Figures 2-4 illustrate the dependencies of the average settlement 840000 costs on the number of iteration for the 1st, 9th, and 820000 10th participants. Analogous dependences are similar 800000 for other agents. In Figure 5, the dependence of the 780000 average total settlements costs on the number of 1 5 9 13 17 21 25 iteration is presented. Figure 6 shows dynamics of the Number of the iteration Monte-Carlo sample size during the optimization. In Figure 7, we give a histogram of the iteration number Figure 5. Dependence of the average total settlement costs needed for algorithm termination. on the number of iteration 2500 Average sample size in iteration 18600 18500 2000 18400 Average of settlements costs 18300 1500 18200 18100 1000 18000 17900 500 17800 17700 0 1 5 9 13 17 21 25 1 5 9 13 17 21 25 Number of iteration Number of the iteration Figure 2. Dependence of the average settlement costs of the 1st participant on the number of iteration Figure 6. Dependence of the average sample size on the number of iteration 391
  5. 5. D. Bakšys, L. Sakalauskas The outcome of the performed simulation shows Frequency of the number of terminate 45 that, by applying the given model of the income of a 40 35 Clearinghouse as well as information technologies, it 30 is possible to optimize the parameters for management of risks of the credit, liquidity, and operational costs. iteration 25 20 Simulation and optimization of transaction costs 15 illustrate an opportunity for banks to maximize the 10 future profit. In this situation, it is especially important 5 0 to study the strategies of management by banks of 1 4 7 10 13 16 19 their correspondent accounts in the Clearinghouse. Number of terminate iteration Figure 7. Histogram of the iteration numbers References for algorithm termination [1] D. Bakšys, L. Sakalauskas. Modelling, simulation and optimisation of Interbank Settlements. Informa- 5. Conclusions tion technology and control (Informacinės technolo- gijos ir valdymas), Vol.36, No.1. Kaunas: Techno- The growth of non-cash payments, and the need to logija, 2007, 43-52. execute real-time payments invokes new challenges to [2] P.R. Krishnaiah, J.C. Lee. Handbook of Statistics. electronic systems of interbank clearing. Vol.1 (Analysis of Variance), North-Holland, Amster- damm-New York-Oxford, 1980. In this paper, the system of simulation and optimi- [3] H. Leinonen, K.Soramäki. Simulating Interbank Pay- sation of interbank settlements is studied by Monte- ment and Securities Settlement Mechanisms with the Carlo simulation. We analyze how banks can manage BoFPSS2 Simulator. Bank of Finland Discussion the settlement costs by depositing (or withdrawing) Papers, No. 23, 2003. assets on the correspondent account. The policy when [4] Payment and Securities Settlement Systems oversight banks deposit or withdraw certain fixed sums is consi- Policy. Board of the Bank of Lithuania, Vilnius, 2003. dered. The stochastic optimisation method to regulate [5] L. Sakalauskas. Nonlinear Stochastic Programming the correspondent agent’s account has been developed By Monte-Carlo Estimators. European Journal on by Monte-Carlo method and investigated by computer Operational Research, Vol.137. 2002, 558-573. simulation. Since only the methods of the first order [6] Yu.M. Ermoliev, V.I. Norkin, R.J-B.Wets. The work in stochastic optimization, we have confined minimization of semicontinuous functions: mollifier ourselves to the gradient-descent type methods. The subgradients. Control and optimization, Vol. 33, No.1, approach surveyed in this paper is grounded by the 1995, 149-167. stopping procedure and the rule for iterative regulation Received September 2007. of the size of Monte-Carlo samples, taking into ac- count the stochastic model risk. The stopping procedure proposed allows us to test the optimality hypothesis and to evaluate the confidence intervals of the objective and constraint functions in a statistical way. The regulation of sample size, when this size is taken inversely proportional to the square of the norm of the gradient of the Monte-Carlo estimate, allows us to solve stochastic optimization problems rationally in computational terms and guarantees the convergence a.s. at a linear rate. The numerical study and the prac- tical example corroborate theoretical conclusions and show that the procedures developed enable us to solve optimization problems with a permissible accuracy by using the acceptable volume of computations (14-35 iterations and 20000 total Monte-Carlo trials). 392

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