Journal of Financial Market Infrastructures

Freeriding on liquidity in the Colombian large-value payment system

Constanza Martínez and Freddy Cepeda

  • The free-riders are financial institutions that intentionally withhold liquidity.
  • This payments strategy may affect the normal functioning of a payment system.
  • Some financial institutions free-ride on liquidity in the Colombian payment system.
  • However, the level of free-riding identified for the period of study is small.

The functioning of a large-value payment system (LVPS) can be affected when some of its participants intentionally decide to delay their payments until they can fund them with payments received from other participants. This payment strategy, known as the free rider (FR) problem, can cause under provision of liquidity in LVPSs operating in real-time gross settlement (RTGS) mode. We empirically tested for the existence of FRs in the Colombian LVPS (CUD) between November 2014 and April 2016. This entailed using regression techniques (quantile regression models) and then computing the empirical quantiles. Our results provide evidence of this problem in the CUD; however, its negative effect on the payment system is considered small.

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