Settlement liquidity in the Colombian large-value payment system: the role of reserve requirements
Summary
Focus
We explore the intraday timing of transactions in Colombia's large-value payment system from 2018 to 2025. We focus on how changes in reserve requirements affect liquidity management by financial institutions. Using high-frequency transaction data, we examine how reductions to reserve requirements, alongside liquidity conditions and institutional developments, shape the timing and distribution of settlements in the payment system.
Contribution
We make three key contributions:
- We add to the limited research linking reserve requirement changes to settlement liquidity and intraday payment timing in emerging markets.
- Ours is the first study to investigate the main drivers of settlement activity in Colombia's large-value payment system. These include reserve requirements, liquidity conditions and institutional adjustments such as the introduction of the new Central Securities Depository system.
- We identify asymmetric responses among large, medium-sized and small financial institutions, showing how reductions in reserve requirements affect participants differently.
Findings
We have three main findings:
- Reserve requirement reductions delayed settlement activity. Lower reserve requirements in April 2020 and September 2024 shifted settlement activity towards later in the day. This increased the concentration of large-value settlements at the end of the day.
- Liquidity and institutional changes reshape patterns. Greater use of intraday repos delays early-day settlements. The new Central Securities Depository system (introduced in 2024) led to earlier settlement of lower-value payments but delayed higher-value transactions.
- Responses among participants are heterogeneous. Small institutions rely more on marginal liquidity and benefit from earlier settlement, while medium-sized and large institutions delay high-value settlements.
These findings underscore the importance of closely monitoring the effects of liquidity-related policy changes and institutional factors on payment system dynamics.
Abstract
This paper analyzes the intraday timing of transactions in Colombia's large-value payment system (CUD) from 2018 to 2025, focusing on how changes in reserve requirements affect liquidity management by financial institutions. Using high-frequency transaction data, we document that reductions in reserve requirements in April 2020 and September 2024 are associated with a shift of settlement activity toward later hours of the day. The effects are heterogeneous, as smaller institutions remain more dependent on marginal liquidity and incoming payments in an interdependent payment network. We also find that the launch of the new Central Securities Depository (DCV) system in April 2024, along with changes in payment volume and value, further reinforces the move toward later settlements. Greater reliance on intraday repos relative to reserves has also reduced early-day activity while improving liquidity management later in the business day.
JEL Codes: C5, E42, E58, G20
Keywords: Payment clearing and settlement systems, intraday liquidity management, reserve requirements
