James Chapman

The Provision of Central Bank Liquidity under Asymmetric Information

A Model of Tiered Settlement Networks

Emerging from the Shadows: Market-Based Financing in Canada

Liquidity Provision and Collateral Haircuts in Payments Systems

Central banks play a pivotal role in well-functioning payments systems by providing liquidity via collateralized lending. This article discusses the role of collateral and haircut policy in central bank lending, as well as the distinguishing features of the central bank’s policy relative to private sector practices. It presents a model that explicitly incorporates the unique role of central banks in the payments system and argues that central banks must consider how their haircut policies affect the relative price and liquidity of assets, the market’s asset allocation, and the likelihood of participants to default. Furthermore, under extraordinary circumstances, there is a rationale for the central bank to temporarily reduce haircuts or broaden the list of eligible collateral to mitigate the shortage of liquidity in the market.

Payment Networks: A Review of Recent Research

In this article, the authors review work done at the Bank of Canada and at other central banks with the relatively new application of network analysis to the study of payments systems. This approach allows researchers to study these systems as a whole, rather than at the participant level. Recent work on Canada’s Large Value Transfer System has revealed two communities of participants within the system. This work provides system overseers and financial-stability policy-makers with a new means of evaluating the systemic importance of individual participants and the connections between them.

Central Bank Haircut Policy

We present a model of central bank collateralized lending to study the optimal choice of the haircut policy. We show that a lending facility provides a bundle of two types of insurance: insurance against liquidity risk as well as insurance against downside risk of the collateral.

Estimating the Structure of the Payment Network in the LVTS: An Application of Estimating Communities in Network Data

In the Canadian large value payment system an important goal is to understand how liquidity is transferred through the system and hence how efficient the system is in settling payments. Understanding the structure of the underlying network of relationships between participants in the payment system is a crucial step in achieving the goal.

Which Bank is the "Central" Bank? An Application of Markov Theory to the Canadian Large Value Transfer System

We use a method similar to Google's PageRank procedure to rank banks in the Canadian Large Value Transfer System (LVTS). Along the way we obtain estimates of the payment processing speeds for the individual banks.

Liquidity Efficiency and Distribution in the LVTS: Non-Neutrality of System Changes under Network Asymmetry

The authors consider the liquidity efficiency of Tranche 2 of the Large Value Transfer System (LVTS T2) by examining, through an empirical analysis, some plausible strategic reactions of individual participants to a systemwide shock to available liquidity in the system.

Policy Coordination in an International Payment System

Given the increasing interdependence of both financial systems and attendant payment and settlement systems a vital question is what form should optimal policy take when there are two connected payment systems with separate regulators.

A Model of Tiered Settlement Networks

This paper develops a model of settlement system to study the endogenous structure of settlement networks, and the welfare consequences of clearing agent failure. The equilibrium degree of tiering is endogenously determined by the cost structure and the information structure. The degree of tiering is decreasing in the fixed cost of operating the second-tier network [...]

Rediscounting Under Aggregate Risk with Moral Hazard

Freeman (1999) proposes a model in which discount window lending and open market operations have different effects. This is important because in most of the literature, these policies are indistinguishable.