Payment system settlement and bank incentives
Abstract: 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.
Status: Published in Review of Financial Studies, Winter 1998
File(s): File format is application/pdf https://www.atlantafed.org/-/media/documents/research/publications/wp/1996/wp9610.pdf
Provider: Federal Reserve Bank of Atlanta
Part of Series: FRB Atlanta Working Paper
Publication Date: 1996