Monday, August 3, 2009

Liquidity Risk in the Payment Systems

this is risk that arises from the possibility that payment, even if made in full, may not be made when due, Instead, it may be forthcoming at a later time than originally contracted. this means that a depository institution may not receive funds when it had counted on those funds being available, making the institution less liquid until the belated payment arrives, hence the term liquidity risk.
CHIPS and Fedwire represent the modern answer to the problem of liquidity risk. in the days of the "old west" depicted in Western shows and movies, liquidity risk was substantial, because poor weather and other inconveniences, such as robberies, could significantly slow the transmission of payments between parties in a transaction. the development of modern mail systems lessened that risk considerably . As we all know, however, check transactions over delivery systems such as the U.S. postal service may or may not always be delivered to a recipient promptly . this fact, coupled with the development of modern communications systems and computers , inevitably has led to the development of wire transfer systems as the means to reduce liquidity risks for the largest transactions.

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