Recent Evolution of Large- Value Payment Systems: Balancing Liquidity and Risk

Large-value payment systems have evolved rapidly in the last 20years, continually striking a balance between providing liquidityand keeping settlement risk under control. Changes to the design or to the risk management policies of such systems were needed, in part, due to the growth in the value of transactions on these systems. For example, in the United States the value of transactions on Fedwire, the Federal Reserve’s large-value payment system, increased from about 50 times GDP in 1989 to over 62 times GDP in 2003. This value exceeded $704 trillion in 2003. This growth raised concerns that the settlement failure of a large institution could pose severe economic consequences. The disruption in settlements after September 11, 2001, brought new focus to questions such as: How reliable are the payment systems? How should liquidity be provided to system participants? And how can central banks protect themselves from excessive risk? This article considers the evolution of large-value payment systems in light of the trade-off between providing liquidity and limiting settlement risk. The main changes worldwide in the last 20 years reflec