RECENT EVOLUTION OF LARGE-VALUE PAYMENT SYSTEMS: Large-value payment systems, or LVPSs, form the basic structure that allows for the transfer of funds from buyer to seller. Although LVPSs have evolved rapidly in recent years, the disruption in settlements after Sept. 11, 2001 brought new focus to questions including: How reliable are the payments systems? How should liquidity be provided to system participants? How can central banks protect themselves from excessive risk? Antoine Martin, economist at the Federal Reserve Bank of Kansas City, explores these questions in “Recent Evolution of Large-Value Payment Systems: Balancing Liquidity and Risk” featured in the first quarter edition of The Economic Review. During a trading day, a payment system participant may want to make an urgent payment although necessary funds might not be available until later in the day. A well-designed LVPS, Martin writes, should allow participants to acquire funds when necessary through intraday credit. The more widespread availability of credit, however, increases the risk that there will be a default on some credit. The evolution of LVPSs has focused on trying to find a balance between liquidity and risk. In the 1980s, more liquid systems were gradually replaced those that mitigated risk. Martin writes that technological progress and faster computers are allowing new systems to combine the best features of older settlement methods and may offer a better trade-off between liquidity and risk, although it is unclear if one system will become dominant. Martin’s article is available on the Bank’s web site at www.kansascityfed.org. ### Return to
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