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Economizing on Liquidity with Deferred Settlement Mechanisms Authors Kurt Johnson, James J. McAndrews and Kimmo Soramaki evaluate the effectiveness of alternative methods of settling Fedwire payments to reduce intraday credit risk. Credit extensions to banks using the Fedwire Funds Service – the Federal Reserve’s real-time gross settlement (RTGS) payments system – can reach intraday peaks as high as $86 billion. The authors simulate three deferred settlement mechanisms that complement RTGS systems. Preliminary results suggest that one mechanism, the receipt-reactive gross settlement (RRGS) system, operating in conjunction with RTGS, could significantly reduce daylight credit extensions while only modestly delaying the average time of payment. The RRGS mechanism bases the settlement of a bank’s payments on the value of its receipts over a given time, rather than on the bank’s balance. The authors believe that further investigation of enhanced payments systems is warranted to help inform policymakers about banks’ potential response to payments system modifications.
Kurt Johnson is an economist and James J. McAndrews a vice president at the Federal Reserve Bank of New York; Kimmo Soramaki is a payment systems policy expert at the European Central Bank and a research visitor at the Federal Reserve Bank of New York.