What To Do about Bilateral Credit Limits in the LVTS When a Closure Is Anticipated: Risk versus Liquidity Sharing among LVTS Participants
The authors examine the effect of a trade-off between shared credit risk and liquidity efficiency, among participants in Tranche 2 of the Large Value Transfer System (LVTS T2), on their decisions to leave open, or close, their bilateral credit limits (BCLs) to a participant at risk of imminent closure. The authors' analysis considers a network of three banks, in a settlement system similar to the LVTS T2. Although it is widely believed that closure of one bank is imminent, the exact timing of the closure - during or after the settlement cycle - is uncertain. The other two banks face an "open or close" choice regarding their BCLs to the problem participant. Based on the expected net payoff of each choice, which includes the value of network externalities, the analysis shows that, when the expected credit loss is sufficiently low, an open-BCL pure-strategy Nash equilibrium can exist and can be Pareto efficient. This result dispels the generality of the frequent assertion that participants in the LVTS T2 will close their BCLs to a participant that is subject to imminent closure.
Which Bank is the 'Central' Bank? An Application of Markov Theory to the Canadian Large Value Transfer System
Recently, economists have argued that a bank's importance within the financial system depends not only on its individual characteristics but also on its position within the banking network. A bank is deemed to be "central" if, based on our network analysis, it is predicted to hold the most liquidity. In this paper, we use a method similar to Google's PageRank procedure to rank banks in the Canadian Large Value Transfer System (LVTS). In doing so, we obtain estimates of the payment processing speeds for the individual banks. These differences in processing speeds are essential for explaining why observed daily distributions of liquidity differ from the initial distributions, which are determined by the credit limits selected by banks.
Resource Allocation In R&D Departments
AbstractThis paper examines the problem of allocating funds within research and development organizations, where several departments and multiple research areas must be considered. Furthermore, impacts arising from budget shifts must be measured in terms of various factors or criteria that may be qualitative or quantitative. Using a particular research and development organization, Ontario Hydro, as a backdrop, we develop a framework for evaluating budget changes when (a) multiple criteria, (b) multiple opinions, and (c) qualitative factors are involved. A three stage procedure for budget allocation is proposed. In the first stage, management responses regarding the perceived impacts of budget changes are combined to arrive at a consensus. In stage two, the multiple criteria consensus values are used to derive an overall impact rating for each proposed budget shift pertaining to each of a set of research areas. Finally, in stage three an optimal subset of budget shifts is chosen from the set of all possib...