The economics of netting in financial networks

Gaffeo, Edoardo; Gobbi, Lucio; Molinari, Massimo

doi:10.1007/s11403-018-0229-4

Cited by 8 publications

(12 citation statements)

References 44 publications

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“…Gaffeo et al. (2019)’s viewpoint was more moderate than those of the scholars mentioned so far. They identified a nonlinear relationship between connectivity and contagious defaults.…”

Section: Results Of Integrative Review: the Affecting Factorsmentioning

confidence: 86%

Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature

Alaeddini

Madiès

Reaidy

et al. 2022

Journal of Economic Surveys

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As the reallocator of liquidity from banks with excess to banks with a deficit, the interbank money market (IMM) plays a fundamental role in the proper functioning of the banking system and the economy as a whole. The aggregate uncertainty derived from stochasticity of the overall level of the demand for short-term liquidity and the likelihood of domino failures of tightly connected competitors who lend themselves vast amounts of liquidity explains the complexity of decisions in this environment. To identify the most significant factors influencing actors' strategies, we first present the five underlying patterns discovered through a bibliometric analysis of 609 scientific documents in this field: contagion and systemic risk, stability, market structure, relationship and trust, and default and failure. Then, our detailed study findings on 160 recent works indicate elements that affect central banks' strategies in reducing systemic risk and preventing financial contagion, as well as managing the interbank network in a way that makes it more stable and resilient to shocks to conserve market confidence. Furthermore, they address factors that influence banks' strategies to maintain their lending relationships and mitigate default risk. In addition toThis is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited.

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“…Gaffeo et al. (2019)’s viewpoint was more moderate than those of the scholars mentioned so far. They identified a nonlinear relationship between connectivity and contagious defaults.…”

Section: Results Of Integrative Review: the Affecting Factorsmentioning

confidence: 86%

Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature

Alaeddini

Madiès

Reaidy

et al. 2022

Journal of Economic Surveys

View full text Add to dashboard Cite

show abstract

“…This motive for delaying payments is considered in Bech (2008) and Bech and Garratt (2012). Gaffeo, Gobbi, and Molinari (2019) examine whether mandating the netting of on‐balance‐sheet interbank assets and liabilities during crisis time can prevent default cascades in financial networks.…”

Section: Related Literaturementioning

confidence: 99%

An Application of Shapley Value Cost Allocation to Liquidity Savings Mechanisms

Garratt¹

2021

J of Money Credit Banking

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Bank of Canada staff working papers provide a forum for staff to publish work-in-progress research independently from the Bank's Governing Council. This research may support or challenge prevailing policy orthodoxy. Therefore, the views expressed in this paper are solely those of the authors and may differ from official Bank of Canada views. No responsibility for them should be attributed to the Bank.

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“…For example, TARGET 2, which is an RTGS system, uses MNS for the endof-day settlement. When banks net their credit/debt obligations instead of clearing their mutual exposures on a gross basis, they decrease the chance of defaults (Gaffeo et al 2019). The effectiveness of netting increases with the inter-connectedness of the network.…”

Section: Interbank Vs Trade Credit Clearingmentioning

confidence: 99%

Mathematical Foundations for Balancing the Payment System in the Trade Credit Market

Fleischman¹,

Dini

2021

JRFM

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The increasingly complex economic and financial environment in which we live makes the management of liquidity in payment systems and the economy in general a persistent challenge. New technologies make it possible to address this challenge through alternative solutions that complement and strengthen existing payment systems. For example, interbank balancing and clearing methods (such as real-time gross settlement) can also be applied to private payments, complementary currencies, and trade credit clearing to provide better liquidity and risk management. The paper defines the concept of a balanced payment system mathematically and demonstrates the effects of balancing on a few small examples. It then derives the construction of a balanced payment subsystem that can be settled in full and therefore that can be removed in toto to achieve debt reduction and payment gridlock resolution. Using well-known results from graph theory, the main output of the paper is the proof—for the general formulation of a payment system with an arbitrary number of liquidity sources—that the amount of liquidity saved is maximum, along with a detailed discussion of the practical steps that a lending institution can take to provide different levels of service subject to the constraints of available liquidity and its own cap on total overdraft exposure. From an applied mathematics point of view, the original contribution of the paper is two-fold: (1) the introduction of a liquidity node with a store of value function in obligation-clearing; and (2) the demonstration that the case with one or more liquidity sources can be solved with the same mathematical machinery that is used for obligation-clearing without liquidity. The clearing and balancing methods presented are based on the experience of a specific application (Tetris Core Technologies), whose wider adoption in the trade credit market could contribute to the financial stability of the whole economy and a better management of liquidity and risk overall.

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The economics of netting in financial networks

Cited by 8 publications

References 44 publications

Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature

Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature

An Application of Shapley Value Cost Allocation to Liquidity Savings Mechanisms

Mathematical Foundations for Balancing the Payment System in the Trade Credit Market

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