Best Paper - Volume 7

The JFI editors are pleased to announce that the JFI Best Paper Prize for the most significant paper published in the 1998 Journal of Financial Intermediation has gone to Xavier Freixas and Bruno Parigi for their paper, "Contagion and Efficiency in Gross and Net Interbank Payment Systems" published in Volume 7, Issue 1. The prize carries with it a $2,500 check for the winners.

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Contagion and Efficiency in Gross and Net Interbank Payment Systems
Xavier Freixas
Universitat Pompeu Fabra, 08005 Barcelona, Spain
AND
Bruno Parigi
University of Venice, 30121 Venice, Italy

Abstract

The increased fragility of the banking industry has generated growing concern about the risks associated with the payment systems. Although in most industrial countries different interbank payment systems coexist, little is really known about their properties in terms of risk and efficiency. How should payment systems be designed? We tackle this question by comparing the two main types of payment systems, gross and net, in a framework where uncertainty arises from several sources: the time of consumption, the location of consumption and the return on investment. Payments across locations can be made either by directly transferring liquidity or by transferring claims against the bank in the other location. The two mechanisms are interpreted as the gross and net settlement systems in interbank payments. We characterize the equilibria in the two systems and identify the trade-off in terms of safety and efficiency.Journal of Economic Literature Classification Numbers: E51, G21. ©1998 Academic Press, Inc.