This paper presents a three-period model to analyze the endogenous need for bank reserves in the presence of Treasury securities. The model highlights the fact that the interbank market is an over-the-counter market. It characterizes the large value payment system operated by the central bank as an implicit contract, and shows that the contract requires less liquidity than decentralized settlement of bank transfers. In this contract, bank reserves are the balances of liquid collateral pledged by banks. The optimal contract is equivalent to the floor system. A private clearing house must commit to a time-inconsistent policy to provide the contract.
Payment Instruments and Collateral in the Interbank Payment System
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