An Application of Shapley Value Cost Allocation to Liquidity Savings Mechanisms

• Published date: 01 September 2022
• Author: RODNEY J. GARRATT
• Date: 01 September 2022
• DOI: http://doi.org/10.1111/jmcb.12853

DOI: 10.1111/jmcb.12853

RODNEY J. GARRATT

An Application of Shapley Value Cost Allocation to

Liquidity Savings Mechanisms

This paper describes a proposal for operating a centralized netting queue for

nonurgent interbank payments that involvestake-it-or-leave-it offers and al-

locates liquidity costs using the Shapley value. This method achieves fair-

ness and ensures welfare-maximizing netting proposals are agreeable to all

providers of liquidity.

JEL codes: C72, E58

Keywords: payment system, liquidity savings mechanism, Shapley value

I  ,   bank provides or over-

sees an infrastructure for settling large-value (wholesale) payments between banks.

Historically,interbank payments were settled using end-of-day netting systems. How-

ever, during the 1980s and 1990s, volumes and values increased rapidly due to the

creation of nancial derivatives and increased integration and globalization of nan-

cial institutions. Central banks became worried about the risks inherent in deferred

net settlement systems. Specically, the risk was that a bank with a largenet debit po-

sition would default during the day,which would not only result in the failure to settle

their payments, but could also lead to a cascade of additional settlement failures by

banks that were counting on that liquidity.1Consequently, over the last few decades,

most countries have abandoned deferred net settlement and have instead opted to

I thank Zhiling Guo for helpful discussions in the early stages of this work. For additional helpful

discussions and comments, I thank John Jackson, Pedro Gurrola-Perez, Andrejus Pustelnikovas,Francisco

Rivadeneyra,and seminar participants at the Bank of Canada, Bank of England, and Bank of Finland. This

paper was written while I was a visiting scholar at the Bank of Canada. The views expressed in this paper

are my own and do not necessarily reect the views of the Bank of Canada.

R J. G is a Professor in the Department of Economics at the University of California,

Santa Barbara (E-mail: garratt@ucsb.edu).

Received November 27, 2019; and accepted in revised form June 11, 2021.

1. Chakravorti (2000) provides a frameworkfor analyzing systemic risk in multilateral net settlement

systems. See also Bech and Soramäki (2005), who examine the systemic impact of participant failures in

Fedwire, the United States’ large value payment system, under the assumption of unsecured multilateral

net settlement, and the related discussion of the Canadian Large ValueTransfer System in Chapman et al.

(2011).

Journal of Money, Credit and Banking, Vol. 54, No. 6 (September 2022)

© 2021 The Ohio State University.