Performance and resilience to liquidity disruptions in interdependent RTGS payment systems Fabien Renault 1   Morten L. Be...
Motivation <ul><li>The 2001 Group of Ten  “Report on Consolidation in the Financial Sector”  (the Ferguson report) noted a...
<ul><li>Could a modeling approach provide any useful additional information to the regulators ?  </li></ul><ul><li>So far,...
<ul><li>Two RTGS systems in two different currencies: $ and € </li></ul><ul><li>Both systems are similar in structure with...
<ul><li>Payment instructions arrive according to a non-homogenous Poisson process </li></ul><ul><ul><li>intuition: custome...
Correlation dynamics High liquidity   PvP or non-PvP Correlation:  0.22 (institution-based interdependency) Low liquidity ...
Summary of main results <ul><li>PvP </li></ul><ul><ul><li>increases queues </li></ul></ul><ul><ul><li>eliminates exposures...
Operational disruption <ul><li>An operational disruption affects a significant local € bank </li></ul><ul><ul><li>The affe...
Operational disruption PvP High Liquidity A B C D E F G H
Operational disruption <ul><li>PvP High Liquidity </li></ul><ul><li>Outage: settlement rate in RTGS $ decreases (-50 %) </...
Operational disruption <ul><li>PvP High Liquidity </li></ul><ul><li>Outage: settlement rate in RTGS $ decreases (-50 %) </...
Operational disruption <ul><li>Period A </li></ul><ul><li>Steady state </li></ul><ul><li>PvP High Liquidity </li></ul><ul>...
Operational disruption <ul><li>Period A </li></ul><ul><li>Steady state </li></ul><ul><li>Period B </li></ul><ul><li>€  bal...
Operational disruption <ul><li>Period A </li></ul><ul><li>Steady state </li></ul><ul><li>Period B </li></ul><ul><li>€  bal...
Operational disruption <ul><li>Period A </li></ul><ul><li>Steady state </li></ul><ul><li>Period B </li></ul><ul><li>€  bal...
Operational disruption <ul><li>Period A </li></ul><ul><li>Steady state </li></ul><ul><li>Period B </li></ul><ul><li>€  bal...
Operational disruption <ul><li>Period A </li></ul><ul><li>Steady state </li></ul><ul><li>Period B </li></ul><ul><li>€  bal...
Operational disruption PvP Low Liquidity A B C D E
Operational disruption <ul><li>PvP Low Liquidity </li></ul><ul><li>Outage: settlement rate in RTGS $ decreases (-65 %) </l...
Operational disruption <ul><li>PvP Low Liquidity </li></ul><ul><li>Outage: settlement rate in RTGS $ decreases (-65 %) </l...
Operational disruption <ul><li>Period B </li></ul><ul><li>€  balances vanish </li></ul><ul><li>€  local payments are queue...
Operational disruption Non-PvP High Liquidity A B C D E F G
Operational disruption <ul><li>Non-PvP High Liquidity </li></ul><ul><li>Outage: settlement rate in RTGS $ decreases (-17 %...
Operational disruption <ul><li>Non-PvP High Liquidity </li></ul><ul><li>Outage: settlement rate in RTGS $ decreases (-17 %...
Operational disruption <ul><li>Period B </li></ul><ul><li>€  balances vanish </li></ul><ul><li>€  local payments are queue...
Operational disruption Non-PvP Low Liquidity A B C D E F
Operational disruption <ul><li>Non-PvP Low Liquidity </li></ul><ul><li>Outage: settlement rate in RTGS $ decreases (-25 %)...
Operational disruption <ul><li>Non-PvP Low Liquidity </li></ul><ul><li>Outage: settlement rate in RTGS $ decreases (-25 %)...
Operational disruption <ul><li>Period B </li></ul><ul><li>€  balances vanish </li></ul><ul><li>€  local payments are queue...
Operational disruption Non-PvP High Liquidity, FX exposures
Operational disruption <ul><li>Non-PvP High Liquidity, FX exposures </li></ul><ul><li>Outage: huge increase in € owed (1 0...
Operational disruption <ul><li>Non-PvP High Liquidity, FX exposures </li></ul><ul><li>Outage: huge increase in € owed (1 0...
Operational disruption <ul><li>Non-PvP High Liquidity, FX exposures </li></ul><ul><li>Outage: huge increase in € owed (1 0...
Cross-currency channels of disruption propagation <ul><li>Channel 1:   Low € balances at the CB prevent settlement of € le...
Cross-currency channels of disruption propagation <ul><li>Channel 1:   Low € balances at the CB prevent settlement of € le...
Cross-currency channels of disruption propagation <ul><li>Channel 1:   Low € balances at the CB prevent settlement of € le...
Cross-currency channels of disruption propagation <ul><li>Channel 1:   Low € balances at the CB prevent settlement of € le...
Cross-currency channels of disruption propagation <ul><li>Channel 2:   Low € customer funds lead to fewer emitted FX trade...
Cross-currency channels of disruption propagation <ul><li>Channel 2:   Low € customer funds lead to fewer emitted FX trade...
Cross-currency channels of disruption propagation <ul><li>Channel 3:   As not all banks are similarly affected, the system...
Cross-currency channels of disruption propagation <ul><li>Channel 3:   As not all banks are similarly affected, the system...
Cross-currency channels of disruption propagation <ul><li>Channel 3: As not all banks are similarly affected, the system b...
Cross-currency channels of disruption propagation <ul><li>Channel 3: As not all banks are similarly affected, the system b...
Conclusions <ul><li>A simple model of interconnected RTGS was developed </li></ul><ul><li>During normal operation, the two...
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Performance and resilience to liquidity disruptions in interdependent RTGS payment systems

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We model the interactions between two payment systems and how interdependencies arise and how disruptions in one system manifest in in another when they are interlinked.

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  • Speaker: Fabien
  • Speaker: Fabien
  • Speaker: Fabien
  • Speaker: Fabien
  • Speaker: Fabien
  • Performance and resilience to liquidity disruptions in interdependent RTGS payment systems

    1. 1. Performance and resilience to liquidity disruptions in interdependent RTGS payment systems Fabien Renault 1 Morten L. Bech 2 Walt Beyeler 3 Robert J. Glass 3 Kimmo Soram ä ki 4 1 Banque de France 2 Federal Reserve Bank of New York 3 Sandia National Laboratories 4 Helsinki University of Technology, www.soramaki.net Joint Banque de France / European Central Bank conference on &quot;Liquidity in interdependent transfer systems&quot; Paris, 9 June 2008 The views expressed in this presentation are those of the authors and do not necessarily reflect those of their respective institutions
    2. 2. Motivation <ul><li>The 2001 Group of Ten “Report on Consolidation in the Financial Sector” (the Ferguson report) noted a possible increased interdependence between the different systems due to: </li></ul><ul><ul><li>The emergence of global institutions that participate to many systems </li></ul></ul><ul><ul><li>The emergence of global service providers offering services to many systems </li></ul></ul><ul><ul><li>The development of DvP procedures linking RTGS and SSS </li></ul></ul><ul><ul><li>The development of CLS </li></ul></ul><ul><li>The report suggested that these trends might accentuate the role of payment and settlement systems in the transmission of disruptions across the financial system. </li></ul><ul><li>To complement this previous work, the CPSS (Committee on Payment and Settlement Systems) commissioned a working group to: </li></ul><ul><ul><li>describe the different interdependencies existing among the payment and settlement systems of CPSS countries </li></ul></ul><ul><ul><li>analyze the risk implications of the different interdependencies </li></ul></ul>
    3. 3. <ul><li>Could a modeling approach provide any useful additional information to the regulators ? </li></ul><ul><li>So far, payment and settlement system modeling has been mainly limited to a single system, with a few exceptions </li></ul><ul><li>We want to model the interactions between two payment systems and understand how interdependencies arise </li></ul><ul><li>We wish to understand how disruptions in one system manifest in the other </li></ul>Motivation System-based Interdependencies System System Financial Institution Institution-based Interdependencies System System IT service provider Environmental Interdependencies System System Dealt with in this presentation
    4. 4. <ul><li>Two RTGS systems in two different currencies: $ and € </li></ul><ul><li>Both systems are similar in structure with 100 banks </li></ul><ul><li>Six “global banks”. Top three banks in each system have a presence also in the other system </li></ul><ul><li>The global banks make FX trades (at constant exchange rate) among each other </li></ul><ul><li>All banks make local payments </li></ul>Coupled RTGS model Model description RTGS € Extended core Core Smaller € local players E 20 E 4 E 21 E 22 E 5 E 23 E 6 E 3 E 1 E 2 E i E 97 RTGS $ Core Extended core Smaller $ local players A 3 A 1 A 2 A 5 A 6 A 23 A 21 A 4 A 22 A 20 A i A 97 E 3 E 1 E 2 A 3 A 2 A 1 FX market
    5. 5. <ul><li>Payment instructions arrive according to a non-homogenous Poisson process </li></ul><ul><ul><li>intuition: customers who have received funds issue payments more frequently than bank customers who have already sent many payments </li></ul></ul><ul><li>FX trades arrival is similar as above, now taking into account balances in both currencies </li></ul><ul><ul><li>E.g. banks with high euro positions are likely to sell euro and vice versa </li></ul></ul><ul><li>Those two systems are linked </li></ul><ul><ul><li>Via the dual participation of some global banks that can make FX trades (institution-based interdependency) </li></ul></ul><ul><ul><li>Via a possible PvP (Payment versus Payment) constraint on the FX trades (system-based interdependency), the alternative being a non-PvP settlement </li></ul></ul>Coupled RTGS model Model description
    6. 6. Correlation dynamics High liquidity PvP or non-PvP Correlation: 0.22 (institution-based interdependency) Low liquidity non-PvP Correlation: -0.02 (none) Low liquidity PvP Correlation: 0.83 (system-based interdependency)
    7. 7. Summary of main results <ul><li>PvP </li></ul><ul><ul><li>increases queues </li></ul></ul><ul><ul><li>eliminates exposures </li></ul></ul><ul><li>Lower liquidity </li></ul><ul><ul><li>increases queues </li></ul></ul><ul><ul><li>Increases exposures (in case of non-PvP) </li></ul></ul><ul><li>Liquidity differences in the two systems </li></ul><ul><ul><li>Reducing liquidity in one system increases queuing in the other (in case of PvP) </li></ul></ul><ul><ul><li>Banks selling the more liquid currency face higher exposures (in case of non-PvP) </li></ul></ul><ul><li>Higher priority for FX trades </li></ul><ul><ul><li>Decreases queues in the more liquid system (in case of PvP) </li></ul></ul><ul><ul><li>Does not affect queues when both systems have same liquidity </li></ul></ul><ul><ul><li>Substantially reduces exposures (in case of non-PvP) </li></ul></ul>
    8. 8. Operational disruption <ul><li>An operational disruption affects a significant local € bank </li></ul><ul><ul><li>The affected bank does not participate in RTGS $, nor engage in FX transactions </li></ul></ul><ul><ul><li>The affected bank is unable to submit its € local payments for a certain duration </li></ul></ul><ul><ul><li>The affected bank acts as a liquidity sink for RTGS € </li></ul></ul><ul><li>To which extent will the disruption affect RTGS $ ? </li></ul><ul><ul><li>Four different cases: </li></ul></ul><ul><ul><ul><li>PvP or non-PvP </li></ul></ul></ul><ul><ul><ul><li>High Liquidity or Low Liquidity (the same in both systems) </li></ul></ul></ul><ul><li>What are the channels of propagation through which the crisis spreads from one RTGS to the other ? </li></ul>
    9. 9. Operational disruption PvP High Liquidity A B C D E F G H
    10. 10. Operational disruption <ul><li>PvP High Liquidity </li></ul><ul><li>Outage: settlement rate in RTGS $ decreases (-50 %) </li></ul>A B C D E F G H
    11. 11. Operational disruption <ul><li>PvP High Liquidity </li></ul><ul><li>Outage: settlement rate in RTGS $ decreases (-50 %) </li></ul><ul><li>Recovery: settlement rate in RTGS $ overshoots </li></ul>A B C D E F G H
    12. 12. Operational disruption <ul><li>Period A </li></ul><ul><li>Steady state </li></ul><ul><li>PvP High Liquidity </li></ul><ul><li>Outage: settlement rate in RTGS $ decreases (-50 %) </li></ul><ul><li>Recovery: settlement rate in RTGS $ overshoots </li></ul>A B C D E F G H
    13. 13. Operational disruption <ul><li>Period A </li></ul><ul><li>Steady state </li></ul><ul><li>Period B </li></ul><ul><li>€ balances vanish </li></ul><ul><li>€ local payments are queued </li></ul><ul><li>Both legs of FX trades are queued, RTGS $ deprived of FX activity </li></ul><ul><li>PvP High Liquidity </li></ul><ul><li>Outage: settlement rate in RTGS $ decreases (-50 %) </li></ul><ul><li>Recovery: settlement rate in RTGS $ overshoots </li></ul>A B C D E F G H
    14. 14. Operational disruption <ul><li>Period A </li></ul><ul><li>Steady state </li></ul><ul><li>Period B </li></ul><ul><li>€ balances vanish </li></ul><ul><li>€ local payments are queued </li></ul><ul><li>Both legs of FX trades are queued, RTGS $ deprived of FX activity </li></ul><ul><li>Period C </li></ul><ul><li>RTGS $ down to local activity </li></ul><ul><li>PvP High Liquidity </li></ul><ul><li>Outage: settlement rate in RTGS $ decreases (-50 %) </li></ul><ul><li>Recovery: settlement rate in RTGS $ overshoots </li></ul>A B C D E F G H
    15. 15. Operational disruption <ul><li>Period A </li></ul><ul><li>Steady state </li></ul><ul><li>Period B </li></ul><ul><li>€ balances vanish </li></ul><ul><li>€ local payments are queued </li></ul><ul><li>Both legs of FX trades are queued, RTGS $ deprived of FX activity </li></ul><ul><li>Period C </li></ul><ul><li>RTGS $ down to local activity </li></ul><ul><li>Period D </li></ul><ul><li>Because of the queuing of FX trades (PvP), customers have lower $ funds and make fewer $ local payments </li></ul><ul><li>Period E-F </li></ul><ul><li>Queued € local payments settle </li></ul><ul><li>Queued FX trades settle </li></ul><ul><li>Period G </li></ul><ul><li>Return to equilibrium generates extra trades </li></ul><ul><li>PvP High Liquidity </li></ul><ul><li>Outage: settlement rate in RTGS $ decreases (-50 %) </li></ul><ul><li>Recovery: settlement rate in RTGS $ overshoots </li></ul>A B C D E F G H
    16. 16. Operational disruption <ul><li>Period A </li></ul><ul><li>Steady state </li></ul><ul><li>Period B </li></ul><ul><li>€ balances vanish </li></ul><ul><li>€ local payments are queued </li></ul><ul><li>Both legs of FX trades are queued, RTGS $ deprived of FX activity </li></ul><ul><li>Period C </li></ul><ul><li>RTGS $ down to local activity </li></ul><ul><li>Period D </li></ul><ul><li>Because of the queuing of FX trades (PvP), customers have lower $ funds and make fewer $ local payments </li></ul><ul><li>Period E-F </li></ul><ul><li>Queued € local payments settle </li></ul><ul><li>Queued FX trades settle </li></ul><ul><li>Period G </li></ul><ul><li>Return to equilibrium generates extra trades </li></ul><ul><li>PvP High Liquidity </li></ul><ul><li>Outage: settlement rate in RTGS $ decreases (-50 %) </li></ul><ul><li>Recovery: settlement rate in RTGS $ overshoots </li></ul>A B C D E F G H
    17. 17. Operational disruption <ul><li>Period A </li></ul><ul><li>Steady state </li></ul><ul><li>Period B </li></ul><ul><li>€ balances vanish </li></ul><ul><li>€ local payments are queued </li></ul><ul><li>Both legs of FX trades are queued, RTGS $ deprived of FX activity </li></ul><ul><li>Period C </li></ul><ul><li>RTGS $ down to local activity </li></ul><ul><li>Period D </li></ul><ul><li>Because of the queuing of FX trades (PvP), customers have lower $ funds and make fewer $ local payments </li></ul><ul><li>Period E-F </li></ul><ul><li>Queued € local payments settle </li></ul><ul><li>Queued FX trades settle </li></ul><ul><li>Period G </li></ul><ul><li>Return to equilibrium generates extra trades </li></ul><ul><li>PvP High Liquidity </li></ul><ul><li>Outage: settlement rate in RTGS $ decreases (-50 %) </li></ul><ul><li>Recovery: settlement rate in RTGS $ overshoots </li></ul>A B C D E F G H
    18. 18. Operational disruption PvP Low Liquidity A B C D E
    19. 19. Operational disruption <ul><li>PvP Low Liquidity </li></ul><ul><li>Outage: settlement rate in RTGS $ decreases (-65 %) </li></ul>A B C D E
    20. 20. Operational disruption <ul><li>PvP Low Liquidity </li></ul><ul><li>Outage: settlement rate in RTGS $ decreases (-65 %) </li></ul><ul><li>Recovery: settlement rate in RTGS $ overshoots (reaches maximum rate) </li></ul>A B C D E
    21. 21. Operational disruption <ul><li>Period B </li></ul><ul><li>€ balances vanish </li></ul><ul><li>€ local payments are queued </li></ul><ul><li>Both legs of FX trades are queued, RTGS $ deprived of FX activity </li></ul><ul><li>Period C </li></ul><ul><li>The queuing of FX trades decreases $ deposits. Agents are uncertain about their $ position, fewer $ local payments emitted </li></ul><ul><li>The distribution of $ deposits is brought out of equilibrium because of the disruption. In this low liquidity context, this causes $ local payments to be queued </li></ul><ul><li>Period D </li></ul><ul><li>Queued € local payments settle </li></ul><ul><li>Queued FX trades settle </li></ul><ul><li>Queued $ local payments settle </li></ul><ul><li>Period E </li></ul><ul><li>Return to equilibrium marginally affects settlement rate </li></ul><ul><li>PvP Low Liquidity </li></ul><ul><li>Outage: settlement rate in RTGS $ decreases (-65 %) </li></ul><ul><li>Recovery: settlement rate in RTGS $ overshoots (reaches maximum rate) </li></ul>A B C D E
    22. 22. Operational disruption Non-PvP High Liquidity A B C D E F G
    23. 23. Operational disruption <ul><li>Non-PvP High Liquidity </li></ul><ul><li>Outage: settlement rate in RTGS $ decreases (-17 %) </li></ul><ul><li>Recovery: no overshoot in RTGS $ </li></ul>A B C D E F G
    24. 24. Operational disruption <ul><li>Non-PvP High Liquidity </li></ul><ul><li>Outage: settlement rate in RTGS $ decreases (-17 %) </li></ul><ul><li>Recovery: no overshoot in RTGS $ </li></ul>A B C D E F G
    25. 25. Operational disruption <ul><li>Period B </li></ul><ul><li>€ balances vanish </li></ul><ul><li>€ local payments are queued </li></ul><ul><li>€ leg of FX trades are queued $ leg of FX trades still settle </li></ul><ul><li>Period C </li></ul><ul><li>The queuing of € local payments decreases € deposits. Agents are uncertain about their € position, fewer FX trades emitted. RTGS $ is deprived from FX activity </li></ul><ul><li>Period D </li></ul><ul><li>Only local activity in RTGS $ </li></ul><ul><li>Period E </li></ul><ul><li>Queued € local payments settle </li></ul><ul><li>Queued € leg of FX trades settle </li></ul><ul><li>Period F </li></ul><ul><li>Return to equilibrium generates extra trades </li></ul><ul><li>Non-PvP High Liquidity </li></ul><ul><li>Outage: settlement rate in RTGS $ decreases (-17 %) </li></ul><ul><li>Recovery: no overshoot in RTGS $ </li></ul>A B C D E F G
    26. 26. Operational disruption Non-PvP Low Liquidity A B C D E F
    27. 27. Operational disruption <ul><li>Non-PvP Low Liquidity </li></ul><ul><li>Outage: settlement rate in RTGS $ decreases (-25 %) </li></ul>A B C D E F
    28. 28. Operational disruption <ul><li>Non-PvP Low Liquidity </li></ul><ul><li>Outage: settlement rate in RTGS $ decreases (-25 %) </li></ul><ul><li>Recovery: settlement rate in RTGS $ overshoots </li></ul>A B C D E F
    29. 29. Operational disruption <ul><li>Period B </li></ul><ul><li>€ balances vanish </li></ul><ul><li>€ local payments are queued </li></ul><ul><li>€ leg of FX trades are queued $ leg of FX trades still settle </li></ul><ul><li>Period C </li></ul><ul><li>The queuing of € local payments decreases € deposits. Agents are uncertain about their € position, fewer FX trades emitted. RTGS $ is deprived from FX activity </li></ul><ul><li>Period D </li></ul><ul><li>Only local activity in RTGS $ </li></ul><ul><li>The distribution of $ deposits is brought out of equilibrium because of the disruption. In this low liquidity context, this causes $ local payments to be queued </li></ul><ul><li>Period E </li></ul><ul><li>Queued € local payments settle </li></ul><ul><li>Queued FX trades settle </li></ul><ul><li>Queued $ local payments settle </li></ul><ul><li>Non-PvP Low Liquidity </li></ul><ul><li>Outage: settlement rate in RTGS $ decreases (-25 %) </li></ul><ul><li>Recovery: settlement rate in RTGS $ overshoots </li></ul>A B C D E F
    30. 30. Operational disruption Non-PvP High Liquidity, FX exposures
    31. 31. Operational disruption <ul><li>Non-PvP High Liquidity, FX exposures </li></ul><ul><li>Outage: huge increase in € owed (1 000 times normal exposures) </li></ul>
    32. 32. Operational disruption <ul><li>Non-PvP High Liquidity, FX exposures </li></ul><ul><li>Outage: huge increase in € owed (1 000 times normal exposures) </li></ul><ul><li>Recovery: large increase in $ owed (15 time normal exposure) </li></ul>
    33. 33. Operational disruption <ul><li>Non-PvP High Liquidity, FX exposures </li></ul><ul><li>Outage: huge increase in € owed (1 000 times normal exposures) </li></ul><ul><li>Recovery: large increase in $ owed (15 time normal exposure) </li></ul>
    34. 34. Cross-currency channels of disruption propagation <ul><li>Channel 1: Low € balances at the CB prevent settlement of € leg of FX transactions (PvP) or create FX exposures (non-PVP) </li></ul>
    35. 35. Cross-currency channels of disruption propagation <ul><li>Channel 1: Low € balances at the CB prevent settlement of € leg of FX transactions (PvP) or create FX exposures (non-PVP) </li></ul><ul><li>PvP: </li></ul><ul><ul><li>All FX settlement activity stops, RTGS $ is deprived from FX settlement activity </li></ul></ul>
    36. 36. Cross-currency channels of disruption propagation <ul><li>Channel 1: Low € balances at the CB prevent settlement of € leg of FX transactions (PvP) or create FX exposures (non-PVP) </li></ul><ul><li>PvP: </li></ul><ul><ul><li>All FX settlement activity stops, RTGS $ is deprived from FX settlement activity </li></ul></ul><ul><ul><li>Because of the queuing of FX trades (PvP), customers have lower $ funds and make fewer $ local payments </li></ul></ul>
    37. 37. Cross-currency channels of disruption propagation <ul><li>Channel 1: Low € balances at the CB prevent settlement of € leg of FX transactions (PvP) or create FX exposures (non-PVP) </li></ul><ul><li>PvP: </li></ul><ul><ul><li>All FX settlement activity stops, RTGS $ is deprived from FX settlement activity </li></ul></ul><ul><ul><li>Because of the queuing of FX trades (PvP), customers have lower $ funds and make fewer $ local payments </li></ul></ul><ul><li>Non-PvP: </li></ul><ul><ul><li>Very high exposures (unsettled € legs) during crisis </li></ul></ul>
    38. 38. Cross-currency channels of disruption propagation <ul><li>Channel 2: Low € customer funds lead to fewer emitted FX trades </li></ul><ul><ul><li>Banks customers’ € liquidity is trapped within queued payments. Therefore, customers emit fewer FX trades </li></ul></ul>
    39. 39. Cross-currency channels of disruption propagation <ul><li>Channel 2: Low € customer funds lead to fewer emitted FX trades </li></ul><ul><ul><li>Banks customers’ € liquidity is trapped within queued payments. Therefore, customers emit fewer FX trades </li></ul></ul>This leads to RTGS $ being eventually deprived of FX activity, even in the non-PvP case
    40. 40. Cross-currency channels of disruption propagation <ul><li>Channel 3: As not all banks are similarly affected, the system becomes unbalanced </li></ul><ul><ul><li>The FX banks for which the disrupted bank is an important counterparty see their level of € customer funds decrease more rapidly. </li></ul></ul><ul><ul><li>These banks become net € buyers ($ sellers) on the FX market. RTGS $ becomes unbalanced. </li></ul></ul>
    41. 41. Cross-currency channels of disruption propagation <ul><li>Channel 3: As not all banks are similarly affected, the system becomes unbalanced </li></ul><ul><ul><li>The FX banks for which the disrupted bank is an important counterparty see their level of € deposits decrease more rapidly. </li></ul></ul><ul><ul><li>These banks become net € buyers ($ sellers) on the FX market. RTGS $ becomes unbalanced. </li></ul></ul><ul><li>Low Liquidity: </li></ul><ul><ul><li>this leads to the queuing of several $ local payments, even in the non-PvP case… </li></ul></ul>
    42. 42. Cross-currency channels of disruption propagation <ul><li>Channel 3: As not all banks are similarly affected, the system becomes unbalanced </li></ul><ul><ul><li>The FX banks for which the disrupted bank is an important counterparty see their level of € deposits decrease more rapidly. </li></ul></ul><ul><ul><li>These banks become net € buyers ($ sellers) on the FX market. RTGS $ becomes unbalanced. </li></ul></ul><ul><li>Low Liquidity: </li></ul><ul><ul><li>this leads to the queuing of several $ local payments, even in the non-PvP case… </li></ul></ul><ul><ul><li>And to an overshoot at recovery, even in non-PvP case </li></ul></ul>
    43. 43. Cross-currency channels of disruption propagation <ul><li>Channel 3: As not all banks are similarly affected, the system becomes unbalanced </li></ul><ul><ul><li>The FX banks for which the operationally disrupted bank is an important counterparty see their level of € deposits decrease more rapidly. </li></ul></ul><ul><ul><li>These banks become net € buyers ($ sellers) on the FX market. RTGS $ becomes unbalanced. </li></ul></ul><ul><li>Low Liquidity: </li></ul><ul><ul><li>this leads to the queuing of several $ local payments… </li></ul></ul><ul><ul><li>And to an overshoot at recovery, even in non-PvP case </li></ul></ul><ul><li>Non-PvP: </li></ul><ul><ul><li>This creates a peak in $ owed exposures at recovery, event at high liquidity </li></ul></ul>
    44. 44. Conclusions <ul><li>A simple model of interconnected RTGS was developed </li></ul><ul><li>During normal operation, the two RTGS are shown to be interdependent </li></ul><ul><li>When a liquidity crisis affects one RTGS, the crisis propagates to second RTGS in all considered cases </li></ul><ul><ul><li>PvP: </li></ul></ul><ul><ul><ul><li>sharp decrease in activity (local and FX) in second RTGS </li></ul></ul></ul><ul><ul><li>Non-PvP: </li></ul></ul><ul><ul><ul><li>Decrease in activity in second RTGS due to fewer FX trades emitted </li></ul></ul></ul><ul><ul><ul><li>At low liquidity, local payments in second RTGS are also affected </li></ul></ul></ul><ul><ul><ul><li>Large increase of FX exposures during crisis and recovery </li></ul></ul></ul>

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