An empirical evaluation of an inter-bank electronic payment system (Mexico)

This dissertation consists of two studies. In the first study we investigate the optimal reserve behavior of banks in the presence of deposit uncertainty. In the second study we evaluate the economic value of network externalities.; In the first paper we investigate the implications deposit uncertainty and penalty costs have on the behavior of bank reserves. Using panel data on daily reserves and clearing house settlements of a cross-section of Mexican banks we estimate the deposit uncertainty banks face and in turn their optimal reserve behavior. We compare the model's predictions of optimal reserve behavior and the observed ones by the banks. The most important variables for forecasting the deposit uncertainty are the interbank fund-transfers of the day, certain calendar dates and the interest differential between the money market rate and the discount rate which reflects the bank's opportunity cost of money holdings. Overall, the model can predict relatively well the reserve behavior of some banks. However, cross-sectional differences in the use of information are evident.; In the second study we investigate the degree to which more timely information generated in an electronic interbank payment network enhances cash management performance of commercial banks. The performance is measured by the opportunity and penalty costs generated by excess balances on the reserve account that commercial banks hold at the central bank. The optimal balance strategy is complicated by the existence of stochastic deposits and withdrawals affecting the reserve account of each bank. We depict the behavior of these costs with a set of daily transactions, bank characteristics and exogenous financial and economic factors. The technology adoption is characterized by an initial stand-alone effect and a network externalities effect as more users adopt the system. To test the model we analyze data from a payment system adopted by all Mexican commercial banks. We find that early adopters of the electronic network, with a low ratio of electronic operations to overall operations, experience an increasing opportunity and penalty costs. However, as additional banks joined the network, the ratio increases and the costs decrease.