Liquidity Management in the Large Value Payment Systems

Abstract

With the advent of Large Value Interbank Fund Transfer Systems operating on an RTGS basis, the bank liquidity management problem has become a crucial issue in payment system analysis for its interrelations with the key monetary policy variables, namely, the short-term interbank interest rate. The analysis of the RTGS system is far from being a trivial task due—mostly—to the complexity and the endogeneity. These stem from the multiplicity of heterogeneous participants (complexity) usually joining a system, whose decisions produce a spillover effect on the rest of the system, which prevents any participant from solving its liquidity demand problem in isolation (endogeneity). Agent Based Models seem to present a few advantages in analysing the payment system in comparison to microfounded ones, as well as to standard simulations: behavioural rules can be assigned to a multiplicity of banks defining the lending or borrowing timing as well as the liquidity sources. Therefore, Agent Based Modelling seems to represent an additional instrument by which to analyse the connection between the payment system and the functioning of one of the most important liquidity sources, the interbank money market.