An assessment of systemic and gridlock risks in the Australian payments system

Publication Type:
Thesis
Issue Date:
2005
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NO FULL TEXT AVAILABLE. Access is restricted indefinitely. ----- Contemporary payments systems in most countries are based on either the deferred netting settlement (DNS) system or the real time gross settlement (RTGS) system but the debate on the pros and cons of these systems continues. The most significant risk in the DNS system is systemic risk while its peer in the RTGS system is the gridlock risk. In order to assess these risks in the Australian payments system, we set up models of the payments system and conducted simulations of its performance as both the DNS system for retail settlements and the RTGS system for large value (wholesale) settlements. The simulations showed that the operation of the Australian RTGS system since 1998 has reduced the intrinsic systemic risk to an unobservable level. Gridlock risk exists in the RTGS system so the system cannot operate smoothly without current liquidity support arrangements from the central bank. We also tested the effectiveness of four possible levels of central bank intervention in case of liquidity crisis. Among them, the intra-day repurchase agreement is the best safeguard against failure of the system. We suggest upgrading the RTGS system to enhance its stability and efficiency. In addition, risk in the DNS and RTGS systems suggests a careful review or supervision of a number of banks that were frequently knocked down in the simulations.
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