Central bank intraday collateral policy and implications for tiering in RTGS payment systems

In this chapter we present a model of a Real-Time Gross Settlement (RTGS) payment system with tiered membership where settlement is facilitated by intraday credit extensions from the central bank. RTGS systems process and settle payment instructions individually in real time, ensuring intraday finality. Furthermore, central banks typically provide the settlement accounts across which payments are processed; hence, settlement is typically effected in central bank money, thereby eliminating counterparty risks between members once settlement has taken place. The model allows us to examine the key factors that influence both an agent’s decision over whether to participate directly in an RTGS payment system, and a central bank’s decision as to whether to require collateralization of intraday credit extensions to payment system participants.