Exploring agent-based methods for the analysis of payment systems: a crisis model for StarLogo TNG

agent-based modeling, payment systems, RTGS, liquidity, crisis simulation Abstract: This paper presents an exploratory agent-based model of a real time gross settlement (RTGS) payment system. Banks are represented as agents who exchange payment requests, which are settled according to a set of simple rules. The model features the main elements of a real-life system, including a central bank acting as liquidity provider, and a simplified money market. A simulation exercise using synthetic data of BI-REL (the Italian RTGS) predicts the macroscopic impact of a disruptive event on the flow of interbank payments. The main advantage of agent - based modeling is that we can dynamically see what happens to the major variables involved. In our reduced-scale system, three hypothetical distinct phases emerge after the disruptive event: 1) a liquidity sink effect is generated and the participants’ liquidity expectations turn out to be excessive; 2) an illusory thickening of the money market follows, along with increased payment delays; and, finally 3) defaulted obligations dramatically rise. The banks cannot staunch the losses accruing on defaults, even after they become fully aware of the critical event, and a scenario emerges in which it might be necessary for the central bank to step in as liquidity provider. The methodology presented differs from traditional payment systems simulations featuring deterministic streams of payments dealt with in a centralized manner with static behavior on the part of banks. The paper is within a recent stream of empirical research that attempts to model RTGS with agent – based techniques.

Systemic risk in artificial worlds, using a new tool in the ABM perspective

We propose SLAPP, or Swarm-Like Agent Protocol in Python, as a simplified application of the original Swarm protocol, choosing Python as a simultaneously simple and complete object-oriented framework. With SLAPP we develop two test models in the Agent-Based Models (ABM) perspective, building an artificial world related to the actual important issue of interbank payment and liquidity

How to Enable Future Faster Payments? An Evaluation of a Hybrid Payments Settlement Mechanism

In the era of Fintech innovation and e-commerce, faster settlement of massive retail transactions is crucial for business growth and financial system stability. However, speeding up payments settlement can create periodic liquidity shortfalls to banks which would incur high cost of funds in the settlement process. We propose a new hybrid settlement mechanism design that integrates features of real-time gross settlement, deferred net settlement, and central queue management structure. The hybrid mechanism is managed by an intermediary and is particularly suitable to settle large volume of small-value retail payments. We evaluate the mechanism using computer experiments and simulation. We find that central-queue netting is an effective means to achieve high system performance. Our results also show that the intermediary plays an important role in coordinating multilateral central-queue netting and supplying liquidity as needed to banks. We offer some policy insights into future faster payments settlement mechanism design and implementation

Simulation analyses and stress testing of payment networks

This publication consists of ten separate studies on payment and settlement systems employing simulation techniques. Most of these were carried out using the payment and settlement system simulator BoF-PSS2 provided by the Bank of Finland. The preliminary versions were presented at the annual simulator seminars arranged by the Bank in 2007 and 2008. The main focus of the analyses is on continuity arrangements, operational stability, liquidity requirements, liquidity economising, gridlock resolution, transaction queuing arrangements, network features and network topologies. The studies examine systems in several countries and cover different kinds of payment systems and regimes.simulation; payment and settlement system; liquidity; gridlock; system risk; network topology

Financial market infrastructures:Essays on liquidity, participant behaviour and information extraction

The economic analysis of financial market infrastructures has gained increasing interest. Financial market infrastructures provide the underlying network of the financial system and are critical for the smooth functioning of financial markets. The thesis includes four separate research projects unified by the notion that data from FMIs can be highly useful to gain a better understanding of system dynamics, but also offer valuable insights on financial market developments in general. The chapters rely heavily on data from TARGET2, the Eurosystem’s large-value payment system. Chapter 2 shows that a higher share of tiered payments from client banks reduces liquidity consumption by settlement banks by giving them more leeway. System designers and overseers should weigh benefits and risks of tiering carefully. Chapter 3 identifies operational outages of participants using an algorithmic approach. The developed algorithm provides a hitherto absent data set on outages that is useful for evaluating compliance with reporting requirements and risk assessment. Chapter 4 investigates changes in the collateral framework and technical aspects of collateral mobilization. A shift towards domestic channels reflects a home bias, especially during the sovereign debt crisis. Due to high inflows, culminating in the Bundesbank’s escalating TARGET2 claims, funding requirements and collateral stocks fell. Chapter 5 investigates why and how data sets on the unsecured interbank money market differ. The systematic approach highlights that different data captures cross-border loans, loans of different banking classes and recurring daily loans unevenly. The analysis is useful for developing reporting frameworks and extracting money market loans from payments data. The last chapter highlights policy implications and trends in payments

Simulation studies of liquidity needs, risks and efficiency in payment networks

This publication consists of nine separate studies on payment and settlement systems conducted using simulation techniques. Most have been carried out using the payment and settlement system simulator BoF-PSS2 provided by the Bank of Finland. The preliminary versions were presented at the annual simulator seminars arranged by the Bank in 2005 and 2006. The main focus of the analyses is on liquidity requirements, settlement speed, gridlock situations, gridlock resolution methods, liquidity economising, systemic risk and the impact of shocks on system performance as well as network analysis and modelling of payment systems. The studies look at systems in several countries and cover both RTGS and netting systems as well as securities settlement systems.simulation; payment and settlement system; payment networks; liquidity; gridlock; systemic risk; counterparty risk

Modelling Payments Systems: A Review of the Literature

Payments systems play a fundamental role in an economy by providing the mechanisms through which payments arising from transactions can be settled. The existing literature on the economics of payments systems is large but loosely organized, in that each model uses a distinct set-up and sometimes a distinct equilibrium concept. As a result, it is not easy to generalize how model features are related to model implications. The authors conduct a non-technical survey of the literature and discuss some of these connections. They organize the literature according to three general classes of modelling approaches, and compare those approaches in terms of their strengths and weaknesses. They also describe the policy implications across the three model classes and relate them to the model environment/assumptions. The authors summarize what can be learned from the literature with respect to policy issues and identify areas for future research.Payment, clearing, and settlement systems

Large value payment systems: principles and recent and future developments

The present European large-value payment systems are on the verge of notable changes. Since they comprise the backbone or basic infrastructure of the whole economy, it is important that the changes are monitored and carried out in a very prudent manner. This paper attempts to analyse this change and provide an understanding of where we stand today and outline some possible prospects. The large-value payment systems are described and analysed in general terms. For the sake of comparison some important large-value payment systems outside of Europe are also examined. It seems that there will be significant changes in the payment systems industry in the near future. Options for many areas are still open but some trends are visible. These trends are: economic integration, increasing pressure from the EU and the regulators to form a single domestic market across the whole EU area, rapidly changing regulatory environment, rapid development of IT, outsourcing of the payment system value chain, increasing emphasis on customer point of view and efficiency. Furthermore, the border line between large- and small value payments could become blurred, TARGET2 brings considerable changes to the present situation, the scope of CLS should be extended, SWIFT system will become industry standard both in cross-border and domestic payments. These developments in the EU might mean, from the Finnish point of view, that the development in several places could go backwards.payment systems; trends; RTGS systems; large-value payments

Systemic risk: A survey

This paper develops a broad concept of systemic risk, the basic economic concept for the understanding of financial crises. It is claimed that any such concept must integrate systemic events in banking and financial markets as well as in the related payment and settlement systems. At the heart of systemic risk are contagion effects, various forms of external effects. The concept also includes simultaneous financial instabilities following aggregate shocks. The quantitative literature on systemic risk, which was evolving swiftly in the last couple of years, is surveyed in the light of this concept. Various rigorous models of bank and payment system contagion have now been developed, although a general theoretical paradigm is still missing. Direct econometric tests of bank contagion effects seem to be mainly limited to the United States. Empirical studies of systemic risk in foreign exchange and security settlement systems appear to be non-existent. Moreover, the literature surveyed reflects the general difficulty to develop empirical tests that can make a clear distinction between contagion in the proper sense and joint crises caused by common shocks, rational revisions of depositor or investor expectations when information is asymmetric ('information-based' contagion) and 'pure' contagion as well as between 'efficient' and 'inefficient' systemic events. JEL Classification: G21, G29, G12, E49banking crises, Contagion, currency crises, financial markets, financial stability, payment and settlement systems, systemic risk