Tag Archives: liquidity saving

How credit risk can incentivise banks to keep making payments at the height of a crisis

Marius Jurgilas, Ben Norman and Tomohiro Ota.

The final, practical determinant of whether a bank is a going concern is: does it have the liquidity to make its payments as they become due?  Thus, the ultimate crucible in which financial crises play out is the payment system.  At the height of recent crises, some banks delayed making payments for fear of paying to a bank that would fail (Norman (2015)).  This post sets out a design feature in a payment system that creates incentives, especially during financial crises, for banks to keep making payments.  This feature could address situations where banks in the system would otherwise be tempted to postpone their payments to a bank that is (rumoured to be) in trouble.

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