After a rapid expansion of financial transactions, both the authorities and financial institutions became aware of the risk involved in interbank settlement systems. To cope with the risk the systems in most economies have been designed so that large-sized payments are settled in the real time gross settlement (RTGS) mode, whereas small ones are dealt with in the designated time net settlement system. Yet the introduction of the RTGS system imposes substantial costs of maintaining intraday liquidity on participants, which creates a fear among European as well as Japanese banking communities that they might lose competitiveness against their US counterparts whose main settlement system, Fedwire, does not require collateral. We first compare these different settlement systems from the participant’s cost-benefit perspective and see if this concern always holds. Second, we develop the same framework to analyse the net settlement system, and then suggest if there is a rationale behind the coexistence of both the RTGS and net settlement systems.
