Sharing the Risk of Settlement Failure : Synopsis

Two policies toward payments-system risk are common, but superficially appear to be contradictory. One policy is to restrict the exposure to risk generated by one participant to other participants who are, by one measure or another, directly concerned with the risky participant. The other policy is to provide a “safety net,” typically provided by government and funded by taxes collected from all participants and even from non-participants, to share losses due to “systemic risk.” In this paper, we provide a model in which both of these policies can be constituents of an economically efficient regime of payments-risk management. ∗This synopsis is prepared for the Second Joint Central Bank Research Conference on Risk Measurement and Systemic Risk, to be held at the Institute for Monetary and Economic Studies, The Bank of Japan, on November 16—17, 1998. The full paper is available, as a Federal Reserve Bank of Minneapolis Working Paper, from h http://woodrow/mpls.frb.fed.usi Any views expressed in this paper are solely those of the authors, and do not necessarily represent Bank of Japan, the Federal Reserve Bank of Minneapolis or the Federal Reserve System, or Hitotsubashi University.