Intraday liquidity management: a tale of games banks play

This article develops a stylized game-theoretical model to analyze banks' intraday liquidity management behavior in an RTGS environment. The authors characterize how the Nash equilibria depend on the underlying cost parameters, and discuss the efficiency implications of the different outcomes....

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Bibliographic Details
Published in:Economic Policy Review - Federal Reserve Bank of New York 2008-09, Vol.14 (2), p.7
Main Author: Bech, Morten L
Format: Article
Language:English
Subjects:
Analysis
Banking industry
Central banks
Costs
Credit policy
Electronic funds transfer systems
Equilibrium
Fees & charges
Forecasts and trends
Game theory
Liquidity
Monetary policy
Opportunity costs
Payment systems
Reserve requirements
Services
Studies
Technology application
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Summary:This article develops a stylized game-theoretical model to analyze banks' intraday liquidity management behavior in an RTGS environment. The authors characterize how the Nash equilibria depend on the underlying cost parameters, and discuss the efficiency implications of the different outcomes. As it turns out, two classic paradigms in game theory emerge from the analysis: the "prisoner's dilemma" and the "stag hunt." This study uses the framework to conduct a comparative analysis of the relative desirability of different intraday credit regimes from the perspective of a benevolent central bank. The simplicity of the framework is both its strength and its weakness. The strength is that it clearly exposes the fundamental trade-offs associated with strategic interaction in an RTGS environment. However, the extensions discussed highlight the complexity faced by banks in managing intraday liquidity, the challenges faced by policymakers, and consequently the difficulty in devising an all-encompassing framework. Nonetheless, the analysis shows the commonality of issues faced by all stakeholders in the world's interbank payments systems.
ISSN:1932-0426
1932-0604