Trade-off between credit risk and liquidity risk in different settlement systems (NET, RTGS and Hybrid)
B y Othman Darwish Introduction According to the report prepared by the Committee on Payment and Settlement Systems of the central banks of the Group of Ten countries in 1997: "Settlement is the actual transfer of funds between the payer's bank and payee's bank. Settlement discharges the obligation of the payer bank to the payee bank in respect of the transfer. Settlement is irrevocable and unconditional and is described as final settlement" . Thus, settlement systems are used to transfer large value payments between financial institutions, aiming to streamline funds transfer in secure, effective and less risk manner. As mentioned by the Bank of Finland Studies (2005), two main risks the participants in the settlement systems expose to; the credit risk and liquidity risk. Credit risk takes place when a defaulted counterparty of the payment "The Debtor" cannot meet the obligation of the full value of the transaction either when settlement date ...