Agostino Capponi and Jin-Wook ChangThis 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.
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