Journal of Financial Market Infrastructures

Risk.net

Analysis of the use and impact of limits

Alexander Müller and Martin Diehl

ABSTRACT

The analysis of the use of limits reveals that they are rarely used and not actively managed. In quantifying the different impacts of limits on the performance of TARGET2 via the simulation of various stress scenarios, this paper contributes to the overall assessment of limits. The paper quantifies the first-round effect of limits (longer queues and more delay) and the partially offsetting second-round effect, which is caused by the liquidity redirection of effective limits. It is shown that the net effect is significantly smaller in the case of a more severe stress scenario. Moreover, it can be proven that in applying limits to late payers the burden of additional delay is systematically shifted toward the late payers. This clearly benefits the limit setters and punishes free riders.

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