CONTAGION AND EFFICIENCY IN GROSS AND NET INTERBANK PAYMENT SYSTEMS

The increased fragility of the banking industry has generated growing concern about the risks associated with payment systems. Although in m ost industrial countries different interbank payment systems coexist, little is really known about their properties in terms of risk and eff iciency. How should payment systems be designed? We tackle this questi on by comparing the two main types of payment systems, gross and net, in a framework where uncertainty arises from several sources: the time of consumption, the location of consumption, and the return on invest ment. Payments across locations can be made either by directly transfe rring liquidity or by transferring claims against the bank in the othe r location. The tyro mechanisms are interpreted as the gross and net s ettlement systems in interbank payments. We characterize the equilibri a in the two systems and identify the trade-off in terms of safety and efficiency. (C) 1998 Academic Press.