Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/261250 
Year of Publication: 
2021
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2021-64
Publisher: 
Bank of Canada, Ottawa
Abstract: 
In this paper, we develop a discrete choice framework to quantify the economic benefits of payments modernization in Canada. Focusing on Canada's large-value transfer system (LVTS), we first estimate participants' preferences for liquidity cost, payment safety and the network effect by exploiting intraday variations in the relative choice probabilities of the two substitutable sub-systems in the LVTS (i.e., Tranches 1 and 2). Then, with the estimated model, we conduct counterfactual simulations to calculate the changes in participants' welfare when the LVTS is replaced by a real-time gross settlement system (RTGS), like Lynx (as an important part of the payments modernization initiative). The results show that, first, compared to the old system, Lynx has higher liquidity costs but is more secure, while the former is considered a more important factor by system participants. Second, when over 90% of current LVTS payments migrate to Lynx, there is an overall welfare gain; however, it maybe difficult to achieve such a high migration ratio in the new market equilibrium. Third, accounting for equilibrium adjustment, about a 75% service level improvement is needed to generate overall net economic benefits to participants. Among other things, adopting a liquidity savings mechanism and reducing risks in the new system could help achieve this improvement. Finally, the welfare changes are quite heterogeneous, especially between large and small participants.
Subjects: 
Financial institutions
Financial system regulation and policies
Payment clearing andsettlement systems
JEL: 
C3
E4
E42
G1
G2
G28
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.