The Intraday Liquidity Management Game

Working paper no 2, 2002

Authors Bech, Morten Linnemann; Garratt, Rod
Subject Payment and settlement systems; Payment systems
Type Working paper
Year 2002
Published 11 April 2002
We use a game theoretical framework to analyze the intraday behaviour of banks with respect to settlement of interbank claims in a real time gross settlement setting. We find that the game played by banks depends upon the intraday credit policy of the central bank and that it encompasses two well-known game theoretical paradigms: the prisoner's dilemma and the stag hunt. The former arises in a collateralized credit regime where we confirm the result of earlier literature that banks have an incentive to postpone payments when daylight liquidity is costly and that this is socially efficient. The latter arises in a priced credit regime where we show that the postponement of payments can be socially efficient.