The impact of de-tiering in the UK's large value payment system

Benos, Evangelos; Ferrara, Gerardo; Gurrola-Perez, Pedro

Abstract

Large-value payment systems (LVPS) often have a tiered structure where only a limited number of banks have direct access to these systems and every other institution accesses the system through agency arrangements with the direct participants. As such, a high degree of tiering is often perceived as being associated with credit and operational risks. In this paper we use data around five recent de-tiering events in the UK's LVPS (CHAPS) to assess the impact of de-tiering on these risks as well as on liquidity usage. We find that the impact of de-tiering is largest on credit risk, where average intraday exposures between first and second-tier banks drop by anywhere between £0.3 billion and £1.5 billion per bank, while the cost of insuring against losses arising from these exposures drops by about £4 million to £19 million per bank, per year. On the other hand, the impact of these de-tiering events on operational risk and liquidity usage appears to be economically small.

Citation

Benos, E., Ferrara, G., & Gurrola-Perez, P. (2018). The impact of de-tiering in the UK's large value payment system. Journal of Financial Market Infrastructures, 6(2/3), 1-32. https://doi.org/10.21314/JFMI.2018.088

• Journal Article Type: Article
• Acceptance Date: Nov 1, 2017
• Online Publication Date: Jan 16, 2018
• Publication Date: Jan 16, 2018
• Deposit Date: Apr 23, 2020
• Publicly Available Date: Jun 2, 2020
• Journal: Journal of Financial Market Infrastructures
• Print ISSN: 2049-5404
• Electronic ISSN: 2049-5412
• Publisher: Incisive Media
• Peer Reviewed: Peer Reviewed
• Volume: 6
• Issue: 2/3
• Pages: 1-32
• DOI: https://doi.org/10.21314/JFMI.2018.088
• Keywords: Payment systems; tiering JEL classification: E42; G23
• Public URL: https://nottingham-repository.worktribe.com/output/4329938
• Publisher URL: https://www.risk.net/journal-of-financial-market-infrastructures/5384356/the-impact-of-de-tiering-in-the-united-kingdoms-large-value-payment-system