In particular, the RTGS system helps to reduce credit risk in that it helps to curtail the counterparty credit risk that exists within the net DNS. The reason for this is because the RTGS system requires that parties settle their payments on a gross basis and in real time. However, it should be mentioned that the credit risk reduction which the RTGS system offers has the disadvantage of the need for rather costly intraday liquidity. Hence, it is clear that the RTGS system does offer some liquidity efficiency as well. However, this is dependent on the degree to which the system make-up provides banks with the motivation to manage their payments in a manner that is socially optimal. It appears that the RTGS provides a platform through which banks can manage their payments in an efficient manner (Reserve bank of Australia 2010).
The reason why this can be said is because under the system, the payment of one bank is a source of intraday liquidity for the receiving bank. The receiving bank could then of course use the funds that it has received to make its own outstanding payments. Therefore, within the RTGS system liquidity efficiency can be reached when banks recycle their liquidity in an efficient manner and as such, the total need for intraday liquidity is reduced to a large extent. At the same time, it should also be noted that the RTGS can also be quite costly for the user since they need to remain liquid throughout the day.
One of the main drawbacks of retail payment systems stems from the fact they have settlement risks entrenched within them since the users of such payment systems are owed money based on their net bilateral positions relative to other users. The DNS system is generally used for the settlement of non-cash retail size transactions (Buckle 2003, p 3). Under the system banks pay each other. The banks then settle the net amounts at the conclusion of the given period. During the period prior to the completion of settlements, banks are in actual fact providing each other with unsecure and sometimes, unmonitored loans. As such, the credit risk under the DNS system is quite substantial (Buckle 2003). Compared to the DNS, the RTGS has very little credit risks involved within since payments are settled between participants on a gross basis in actual time (Reserve bank of Australia 2010).
Based on the characteristic of RTGS, the payments are settled at the real time and cannot change or cancel; RTGS system can contribute substantially to limiting payment system risk, with their continuous intraday final transfer capability, also RTGS systems are able to minimize the basic interbank risk in the settlement process and therefore is more stable. Moreover, since banks can make final funds transfers at the time of their choice during the day, settlement pressures are not concentrated at particular points in time. This make it likely that banks have more time to deal with problems, for example, a liquidity or solvency problem of a participant in the system. (Reserve Banks of Australia Bulletin 1998)
Around 90 per cent of the value of non-cash transactions is accounted for by a small number of high-value payments. Since 1998, the data show that around 90 per cent of the value of all payments are exchanged between banks electronically, compared with 40 per cent at the beginning of the 1990s. (Reserve Banks of Australia Bulletin 1998)
Over a decade since the RTGS was introduced, it has been playing a major role in settlements of interbank transactions. The volume and value of daily RTGS has been growing continuously. However, there was a slightly downturn during 08/09 period as the result of the Global Financial Crisis.
It is shown clearly in the figure below (Reserve bank of Australia Bulletin 2010) :
Figure:
The number of RTGS settlements has started to recover since June 2010 when effects of the global financial crisis seem less prominent, around 32 000 transactions per day (worth around $168 billion) were settled. The total value of these RTGS payments equated to about 13% of Australia’s GDP (Reserve bank of Australia Bulletin 2010).
To compare with the other non-cash transactions, a research of DNS has been undertaken to acknowledge the differences between RTGS and them. Non-cash retail transaction which is low-value transactions is settled on the net-deferred settlement basis. With this system, all transactions are batched together and the net settlement position will be achieved through the bank’s exchange settlement account with Reserve Bank of Australia at 9am the following business day. With a huge value of transactions of various institutions, there is an increase in the payment risk which happens when a party to transaction fails to deliver its fund and systematic risk which is caused by payment system’s collapse. In contrast, RTGS is used for processing high-value transactions, and its settlement is achieved immediately.
With the emergence of RTGS, the risk of non-cash retail transactions is reduced. Through RTGS, each transaction is settled individually by its gross value, and the exchange settlement accounts are debited or credited directly in RBA. Additionally, the settlement would not take place if there is no fund available and would not be unwound by neither involved parties after it had taken place. This means the settlement through RTGS system is irrevocable. However, non-cash retail transactions would be processed as a multilateral net settlement position. The settlements take longer time to be settled; therefore, participants can repeal the payment process.
In conclusion, in 1998, RTGS, a new method in the payment system by which the transaction is settled immediately and individually, was introduced in Australia. The RTGS is mainly used for the high-value transaction through the ES accounts while the low-value transactions continue to be batched settled on DNS. By clearing and settling high-value transactions in real time, avoiding the accumulating of deferring of fund transferred, RTGS has helped to reduce and eliminate the settlement risks and systemic risks, hence strengthen the reliability of the financial system. Compared to other non-cash retail size transactions based on DNS, GTRS has several advantages which led to the increasing proportion in using this method in the payment system. In these later years, not only high-value transactions but also a large volume of low-value transactions had been settled through RTGS. With the benefits brought by RTGS, the Reserve Bank of Australia is going to develop the efficiency of RTGS system, and it is expected to see RTGS continue to grow and playing its vital role in the Australian payment system.
References:
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Buckle, S. 2003 Settlement bank behavior and throughput rules in an RTGS payment system with collateralized intraday credit, Working paper no. 209
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Reserve Bank of Australia. 1998, Some features of the Australian payments system, Reserve Bank of Australia, viewed 10 Aug 2010
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Reserve Bank of Australia. 2004, Financial Stability Review March 2004, Reserve Bank of Australia, viewed 10 Aug 2010
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Reserve Bank of Australia. 2010, Real-time Gross Settlement in Australia, Reserve Bank of Australia, viewed 10 Aug 2010
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Viney, C. 2009, Financial Institutions, Instruments & Markets, 6th edition, McGraw-Hill, Australia, pp. 430-432.