Measuring the Impact of a Failing Participant in Payment Systems

IMF Working Papers, June 5, 2020

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Purpose: Develops a composite risk indicator to evaluate the criticality of participants in a large value payment system network by combining liquidity risk and interconnections in one approach.
Application: The indicator is applied to the TARGET2 payment system.
High-level conclusion: The most critical participants in TARGET2 are other payment systems because of the size of underlying payment flows; some banks may be critical mainly due to their interconnectedness with other TARGET2 participants; central counterparties and central securities depositories are less critical.
Use cases: Findings can be used in financial stability analysis and feed into central bank policies on payment system access, oversight, and crisis management.

Composite risk indicator: Combines liquidity risk and interconnections within a single evaluative framework.
Network focus: Evaluates participant criticality within a large value payment system network (TARGET2 in application).

The most critical participants in TARGET2 are other payment systems, driven by the size of their underlying payment flows.
Some banks can be critical participants, but their criticality is mainly explained by their interconnectedness with other TARGET2 participants.
Central counterparties and central securities depositories are less critical within the TARGET2 network according to the composite indicator.

Financial stability analysis: The composite indicator provides a tool for assessing sources of instability stemming from participants unable to fulfill payment obligations.
Central bank policies: Results can inform policy on payment system access, oversight, and crisis management for FMIs and banks.