Payment System Settlement and Bank Incentives
- 1 October 1998
- journal article
- research article
- Published by Oxford University Press (OUP) in The Review of Financial Studies
- Vol. 11 (4) , 845-870
- https://doi.org/10.1093/rfs/11.4.845
Abstract
In this article, we consider the relative merits of net versus gross settlement of interbank payments. Net settlement economizes on the costs of holding non-interest-bearing reserves, but increases moral hazard problems. The “put option” value of default under net settlement can also distort banks' investment incentives. Absent these distortions, net settlement dominates gross, although the optimal net settlement scheme may involve a positive probability of default.Keywords
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