Payments Settlement: Tiering in Private and Public Systems


  • This paper is a reworking and extension of our earlier paper “Payments Settlement under Limited Enforcement.” The authors are grateful to Cyril Monnet, Ed Nosal, Henri Pages, as well as to participants in presentations at the Bank of England, the Federal Reserve Banks of Cleveland and New York, Tokyo University, the 2003 SED meetings and the 2004 winter meetings of the Econometric Society, for comments on earlier drafts. We are especially grateful to an anonymous referee for several valuable suggestions and corrections. Views expressed are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.


What are the benefits provided by a payment system? What are the trade-offs in public versus private payment systems and in restricted versus open payments arrangements? Modern payment systems encompass a variety of institutional designs with varying degrees of counterparty protection. We develop a framework that allows for an examination and comparison of payment systems, and specification of conditions leading to their adoption. We relate these conditions to the design of present large-value payment systems (Fedwire, CHIPS, TARGET, etc.).