Chapter

The Economics of Systemic Risk in International Settlements

Kern Alexander, Rahul Dhumale and John Eatwell

in Global Governance of Financial Systems

Published in print September 2005 | ISBN: 9780195166989
Published online September 2007 | e-ISBN: 9780199783861 | DOI: http://dx.doi.org/10.1093/acprof:oso/9780195166989.003.0009
 The Economics of Systemic Risk in International Settlements

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This chapter examines the extent to which different settlement systems affect the nature of systemic risks and the potential vulnerability of the financial system to such problems. It considers whether externalities can be reduced if individual institutions fully internalize the costs of their actions specifically by creating private submanagement systems as low-cost alternatives. The proposed standards for payments and risk control features, including the length of time during which participants are exposed to credit and liquidity risks, are addressed. The role of public intervention through prudent regulation in the payments system is discussed. The chapter concludes by discussing the establishment of minimum regulatory standards — whether in terms of interest charges, collateralization requirements, or loss-sharing agreements — and the associated tradeoffs between their costs and their ability to reduce risk.

Keywords: payment settlement systems; systemic risks; financial system; financial regulation; risk management

Chapter.  7478 words. 

Subjects: Financial Markets

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