Journal of Financial Market Infrastructures

Risk.net

The impact of de-tiering in the United Kingdom’s large-value payment system

Evangelos Benos, Gerardo Ferarra and Pedro Gurrola-Perez

  • Using data around five recent de-tiering events in the UK's large value payment system (CHAPS) we assess the impact of tiering on credit and operational risks as well as on liquidity usage.
  • We find that the impact of de-tiering is largest on credit risk, where average intraday exposures between first and second-tier banks drop by anywhere between £0.3 billion and £1.5 billion per bank. 
  • On the other hand, the impact of these de-tiering events on operational risk and liquidity usage appears to be economically small.

Large-value payment systems (LVPSs) often have a tiered structure, whereby only a limited number of banks have direct access to these systems, while every other institution accesses it through agency arrangements with direct participants. As such, a high degree of tiering is often perceived as being associated with credit and operational risks. In this paper, we use data around five recent de-tiering events in the United Kingdom’s LVPS (Clearing House Automated Payment System) to assess the impact of de-tiering on these risks as well as on liquidity usage. We find that the impact of de-tiering is largest on credit risk, where average intraday exposures between first- and second-tier banks drop by anywhere between £0.3 billion and £1.5 billion per bank, while the cost of insuring against the losses arising from these exposures drops by £4 million to £19 million per bank, per year. Nevertheless, the impact of these de-tiering events on operational risk and liquidity usage appears to be economically small.

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