IMF Working Papers

Measuring the Impact of a Failing Participant in Payment Systems

Author/Editor:

Fernanda Brollo ; Froukelien Wendt

Publication Date:

June 5, 2020

Electronic Access:

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Summary:

Banks and financial market infrastructures (FMIs) that are not able to fulfill their payment obligations can be a source of financial instability. This paper develops a composite risk indicator to evaluate the criticality of participants in a large value payment system network, combining liquidity risk and interconnections in one approach, and applying this to the TARGET2 payment system. Findings suggest that the most critical participants in TARGET2 are other payment systems, because of the size of underlying payment flows. Some banks may be critical, but this is mainly due to their interconnectedness with other TARGET2 participants. Central counterparties and central securities depositories are less critical. These findings can be used in financial stability analysis, and feed into central bank policies on payment system access, oversight, and crisis management.

Series:

Working Paper No. 2020/081

Subject:

Asset and liability management Banking Financial markets Financial regulation and supervision Large value payment systems Liquidity Liquidity risk Payment systems PFM information systems Public financial management (PFM)