Modeling the Cross-Border Use of Collateral in Payment Systems
Every businessman wants that his goods or service is sold at a fixed price to the client. He offers timely delivery of the service or product and wants secure payment in return for the same. There are many firms that offer services or products across the globe. They need to make and receive Cross-border payment.
As far as cross border payment system is concerned, there are numerous ways in which it can be paid via Society for Worldwide Interbank Financial Telecommunication (SWIFT), EBICS (Electronic Banking Internet Communication Standard), Blockchain or PayPal.
The collateralized intraday liquidity from the central bank in order to be able to effect payments in a real-time gross settlement (RTGS) payment system is one of the forms of payment that the banks depend on. One cannot get hold of credit from the local central banks, it may have to delay payments in case a bank is holding insufficient eligible collateral in a specific country. This comprises of a liquidity risk to the system. A mismatch between the location of its collateral holdings and liquidity needs occurs if a bank operates in multiple systems.
It is imperative for secure payment processing that the mismatch may be mitigated by allowing cross-border use of collateral. We do this by examining the extent to which the liquidity risks.