Federal Reserve Bank of New York ∗† (2008)
BibTeX
@MISC{Bech08federalreserve,
author = {Morten L. Bech and Rod Garratt},
title = {Federal Reserve Bank of New York ∗†},
year = {2008}
}
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Abstract
We show how the interbank payment system can become illiquid following widescale disruptions. Two forces are at play in such disruptions—operational problems and changes in participants ’ behavior. We model the interbank payment system as an n-player game and utilize the concept of a potential function to describe the process by which one of multiple equilibria emerges after a wide-scale disruption. If the disruption is large enough, hits a key geographic area, or hits a “too-big-to-fail ” participant, then the smooth processing of payments can break down, and central bank intervention might be required to reestablish the socially efficient equilibrium. We also explore how the network topology of the underlying payment flow among banks affects the resiliency of the interbank payment system. The paper provides a theoretical framework to analyze the effects of events such as the September 11 attacks. JEL classification: C72; E58
Keyphrases
federal reserve bank interbank payment system new york theoretical framework potential function jel classification smooth processing efficient equilibrium wide-scale disruption widescale disruption too-big-to-fail participant multiple equilibrium emerges disruption operational problem underlying payment flow n-player game network topology key geographic area central bank intervention
