RDP 2012-06: The Impact of Payment System Design on Tiering Incentives 8. Conclusions

Australia's RTGS system, RITS, has a low level of tiering relative to many RTGS systems elsewhere. The results of the simulations conducted in this paper provide some evidence to support the hypothesis that the design of RITS (that is, an RTGS system with a central queue, a bilateral-offset algorithm and a liquidity-reservation feature) reduces the incentive to save liquidity by tiering.

While tiering can reduce liquidity needs, it can also increase risk in the system. In terms of credit risk, the simulations provide some evidence to suggest that settlement banks' exposures to clients might be higher in systems more liquidity-intensive than RITS, although this result is not conclusive. Also, if there were to be an increase in tiering from current low levels, this would result in only small increases to the already high level of concentration in RITS, though it could potentially lead to substantial increases in the share of total payments that individual institutions are responsible for processing.

Fully quantifying the benefits and costs of tiering to find the socially optimal level of tiering is left to future consideration. Nevertheless, the results suggest that for institutions below the 0.25 per cent threshold, settling indirectly provides only modest liquidity savings, but it does so without substantially increasing credit or concentration risk. On the other hand, the results suggest that both liquidity savings and risks would increase significantly if institutions above the 0.25 per cent threshold were allowed to tier.