Liquidity and Operational Risk: Interbank Payment Networks

Kimmo Soramäki and Samantha Cook

Interbank payment systems are networks where the nodes are banks or other financial institutions and links represent payments made from one institution to another. Interbank payment and settlement systems provide the backbone for all financial transactions. This chapter will cover the analysis of payment systems, focusing on simulation. It will provide detailed examples of analysing and summarising payment systems, performing simulations on payments data, and generating realistic networks and payment distributions as input to simulations when actual payments data are not available. Simulation output can be combined with network-based centrality metrics for further analysis.

Systemic risk in payment systems has been studied since Humphrey (1986), who found significant risk in the US Fedwire system in the mid-1980s. Subsequent studies by Angelini, Maresca and Russo (1996), Bech and Soramäki (2002) and Galos and Soramäki (2005) found the risks to be limited. Since then, however, most payment systems have switched from net settlement to real-time gross settlement (RTGS; Bech, Preisig and Soramäki, 2008), transforming credit risk into liquidity risk as gross settlement eliminates the