Finance and Economics Discussion Series (FEDS)
November 2025 (Revised June 2026)
Settlement Speed and Financial Stability
Agostino Capponi and Jin-Wook Chang
Abstract:
This paper investigates how settlement speed affects financial stability in payment networks, accounting for netting benefits, liquidity costs, and counterparty risks. Faster settlement reduces crisis likelihood but amplifies crisis severity. The net welfare effect depends on network topology and proximity to default threshold points—settlement times at which the number of defaulting agents changes discontinuously. The optimal settlement speed is not universal: it depends on payment network structure and liquidity conditions. Deteriorating liquidity shifts the optimum toward slower settlement, even when faster settlement reduces counterparty default probability.
Keywords: settlement, payment systems, financial network, financial stability, systemic risk
DOI: https://doi.org/10.17016/FEDS.2025.101r1
PDF: Full Paper
Original Paper: PDF
Disclaimer: The economic research that is linked from this page represents the views of the authors and does not indicate concurrence either by other members of the Board's staff or by the Board of Governors. The economic research and their conclusions are often preliminary and are circulated to stimulate discussion and critical comment. The Board values having a staff that conducts research on a wide range of economic topics and that explores a diverse array of perspectives on those topics. The resulting conversations in academia, the economic policy community, and the broader public are important to sharpening our collective thinking.