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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