Intraday liquidity around the world
BIS Working Papers | No 1089 | 14 April 2023
This is the first paper to systematically study intraday liquidity usage by financial institutions in LVPSs across several jurisdictions over a long period of time. Using a unique cross-country data set, we measure intraday liquidity usage at a daily frequency, at the system level, and assess its drivers. We find that intraday liquidity usage is highly economically significant, accounting for 15% of daily aggregate payment values on average or about 2.3% of local GDP.
Consistent with the theoretical literature, we also find that intraday liquidity usage depends on the way system participants interact with one another in an LVPS. For instance, a higher degree of payment coordination is associated with higher liquidity efficiency (i.e., with a higher value of payments made for every unit of intraday liquidity used). Payment
coordination in turn, depends on both policy-related variables, such as the overall supply of central bank reserve balances and system-specific institutional characteristics.
Regarding the former, we find that higher aggregate reserve balances, which are largely the result of quantitative easing programs in several jurisdictions in our sample, are associated with reduced incentives among participants to coordinate their payments and thus economize on intraday liquidity usage.
On the flip side, higher reserve balances appear to induce earlier payment submission and also reduce the reliance on just a few system participants to provide liquidity to the rest. Both of these effects are desirable, as they help
reduce the impact of potential operational outages in the LVPS. In general, the amounts of excess liquidity that have been injected by central banks in many jurisdictions appear to have reduced the benefit of liquidity saving and the need to manage intraday liquidity.
The most novel contribution of our paper, however, is the assessment of the effect of institutional and system-specific characteristics on intraday liquidity usage. Since these characteristics are generally time-invariant, such an analysis requires cross-country data on large-value payments, which our paper is the first to assemble. Our analysis yields several new results. First, incentives for early payment submission seem to have a stronger effect on
payment coordination than actual payment submission times. Given that these incentives often take the form of penalties, it appears that they induce system participants to coordinate their submission times to avoid “standing out from the pack”. Interestingly, the resulting increase in coordination renders the payment system more liquidity-efficient as it facilitates
payment recycling.
Second, system participants appear to endogenize some of the LSM design features. This improves liquidity efficiency in some cases but worsens it in others. For example, multilateral offsetting is associated with increased payment coordination, which could be explained by participants coordinating their payments more in order to take full advantage of the functionality. Increased payment coordination among participants then further enhances
liquidity efficiency. On the other hand, the presence of a FIFO bypass functionality, whereby the offsetting algorithm can bypass the time priority of submitted payments, is associated with reduced payment coordination.
One potential explanation for that is that participants are less incentivized to coordinate their payments in the presence of FIFO bypass. This reduces liquidity efficiency. Overall, a key insight from our paper is that, in endogenizing the various payment system design features and institutional arrangements, system participants can influence the aggregate amount of intraday liquidity they use to fund their payments. We believe that understanding these endogenous dynamics is important when designing payment systems and therefore additional research in this area is warranted.
https://www.bis.org/publ/work1089.pdf
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