Email
Print Friendly
A A A

Atlanta Fed Working Papers


Payment System Settlement and Bank Incentives

Charles M. Kahn and William Roberds
Federal Reserve Bank of Atlanta
Working Paper 96-10
October 1996

PDFDownload the full text of this paper in Adobe Acrobat 4.0 PDF format - (750 KB)
DOWNLOAD ACROBAT® READER SOFTWARE

In this paper 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. Net settlement becomes more attractive relative to gross settlement if bank assets have to be liquidated at less than book value.

JEL classification: G21, G28

To receive notification about new papers or to order copies of printed papers, please use our Publications Order Form.