A competitive multi-agent model of interbank payment systems

We develop a dynamic multi-agent model of an interbank payment system where banks choose their level of available funds on the basis of private payoff maximisation. The model consists of the repetition of a simultaneous move stage game with incomplete information, incomplete monitoring, and stochastic payoffs. Adaptation takes place with bayesian updating, with banks maximizing immediate payoffs. We carry out numerical simulations to solve the model and investigate two special scenarios: an operational incident and exogenous throughput guidelines for payment submission. We find that the demand for intraday credit is an S-shaped function of the cost ratio between intraday credit costs and the costs associated with delaying payments. We also find that the demand for liquidity is increased both under operational incidents and in the presence of effective throughput guidelines.

Introduction
Virtually all economic activity is facilitated by transfers of claims towards public or private financial institutions. The settlement of claims between banks takes to a large extent place at the central bank, in central bank money. These interbank payment systems transfer vast amounts of funds, and their smooth operation is critical for the functioning of the whole financial system. In 2004, the annual value of interbank payments made in the European TARGET was around $552 trillion, in the US Fedwire system $470 trillion, and in the UK CHAPS $59 trillion -tens of times the value of their respective gross domestic products (BIS 2006). These transfers originate from customer requests, and from the banks' proprietary operations in e.g. foreign exchange, securities and the interbank money market. The sheer size of these transfers, and their centrality for the functioning of a number of markets, make the mechanisms that regulate these fluxes and the incentives that generate them interesting to policy makers and regulators.
At present most payment systems work on a real-time gross settlement (RTGS) or equivalent modality. In RTGS payments are settled continuously and individually throughout the day with immediate finality. To cover the payments banks generally use their reserve balances, access intraday credit from the central bank or use incoming funds from payments from other banks. The first two sources carry an (opportunity) cost which gives banks incentives to economize on their use. We call these funds liquidity. The third source, on the other hand, is dependent by the liquidity decisions of other banks. The less liquidity a bank commits for settlement, the more dependent it is from incoming payments -and may thus need to delay its own payments until these funds arrive, causing the receivers of its payments to receive funds later. If also delays are costly, each bank faces a trade-off between liquidity costs and delay costs. Both aspects are dependent on the banks own liquidity decision, but the latter is also dependent on the liquidity decisions by other banks.
This paper develops a dynamic model to study this trade-off. The model consists of a sequence of independent settlement days where a set of homogenous banks make payments to each other. Each of these days is a simultaneous-move game (or a stage game) in which banks choose their level of liquidity for payment processing. At the end of the day they receive a stochastic payoff determined by the amount of liquidity they committed and delays they experienced. Due to the nature of the settlement process, the payoff function is a random variable unknown to the banks. In this context, a reasonable assumption is that banks use heuristic, bounded-rational like rules to adapt their behaviour over time. Hence, we simulate a learning process taking place over many days, until banks settle down in equilibria. We are interested in the properties of the equilibria in aggregate terms, i.e. in the behaviour of the system as the product of independent, single agents' private payoff maximization.
Given its game-theoretic approach, this paper is related to recent work by Angelini (1998), Garratt (2003, 2006), Buckle and Campbell (2003) and Willison (2004). These study various "liquidity management games" with few (typically, two) agents and few (typically, three) periods. There, however, the payoff function is common knowledge. Due to the complex mechanics taking place in real payment systems this is likely to be unrealistic. Recent work by Beyeler et al. (2007) on the relationship between instruction arrival and payment settlement in a similar setting shows that with low liquidity, payment settlement gets coupled across the network and is governed by the dynamics of the queue -and largely unpredictable when a large number of payments are made. The present paper makes an effort to model this complexity; in a similar spirit, it also considers a large number of banks, which settle payments in a continuous-time day, and which interact over a long sequence of settlement days.
Recently, a growing literature has used simulation techniques to investigate the effects e.g. of failures in complex payment systems (see eg. BoE (2004), Leinonen (2005), Devriese and Mitchell (2005)). These studies generally use historical payment data and simulate banks' risk exposures under alternative scenarios, or ways to improve liquidity efficiency of the systems. The shortcoming of this approach has been that the behaviour of banks is not endogenously determined. It is either assumed to remain unchanged or to change in a predetermined manner.
The present paper tries to overcome some of the shortcomings of both "game theoretic" and "simulation" approaches by modelling banks as learning agents. Agents who learn about each others' actions through repeated interaction is a recurring theme in evolutionary game theory. In one strand of the literature 1 the agents know their payoff function, and learn about others' behaviour. They do so playing the stage game repeatedly, while choosing their actions on the basis of adaptive rules of the type "choose a best reply to the current strategy profile" or "choose a best reply to the next expected strategy profile". Results obtained in this strand cannot be immediately applied here: banks cannot choose best replies as they do not know their payoff function. A second research line does not require knowledge of the payoff function on the part of the learners; they are instead of the kind "adopt more frequently an action that has produced a high payoff in the past". The main results of this literature are about the convergence (or non-convergence) of actions to equilibria of the stage game.
The approach adopted here is close to the latter. However, because the payoffs are calculated on the basis of a settlement algorithm, we cannot analytically calculate the equilibria ex-ante, and then demonstrate convergence (or the lack of it). Instead, we show convergence by means of simulations, inferring then that the attraction points are equilibria of the stage game -in a sense that we make precise. Because the payoff function is stochastic and unknown, the problem of each optimizing bank lends itself to a heuristic approach. From this perspective, our work bears strong links to the reinforcement learning literature 2 . From an individual agent's perspective it relates it relates to operations research, where a typical problem is that of maximizing an unknown function.
However, in our setting the environment is not static: through time, actions yield different payoffs both because the payoff function is random, and because the other agents change their behaviour.
The model is rich enough to investigate a number of policy issues; here, we focus on the aggregate liquidity of the system. As a first result we derive a liquidity demand function, relating total funds to the ratio of delay to liquidity costs. This function is found to be increasing to the relative cost of delay, and S-shaped. Then, we look at the effect of operational incidents affecting random participants of the system. We find that banks would generally prefer to commit more liquidity in case the disruption were known -except from the extreme cases of very low and very high delay costs. Throughput guidelines for payment submission are a common used by system-designers to reduce risk in payment systems; 3 we look at the effect of one such rule on liquidity usage and find that at sufficiently low delay costs banks would increase their liquidity holdings to contain delays. Finally, we explore some efficiency issues, namely whether smaller systems are more or less liquidity efficient than large ones. We find that a system with a smaller number of banks uses less liquidity for a given level of payment activity.
The paper is organised as follows: Section 2 develops a formal description of the model and the agents' learning process, and describes the payoff function. Section 3 presents the results of the experiments and section 4 concludes.
2 Description of the model

Stage game and its repetition
The model consists of N agents indexed by i = 1...N , who repeatedly play a stage game Γ = A, π 1 , π 2 , ...π N . Here A = {0, 1, ...K} is the (common) finite action set for each agent, and π i : A N → F is i's outcome function, which maps the set of action profiles into a set of payoff distribution functions. That is, given the action profile a ∈ A N , agent i receives a stage-game payoff drawn from a univariate distribution π i (a), whose shape depends on N parametersthe stage game action profile. To keep the exposition uncluttered, we leave the precise form of the outcome function π i (.) undefined at the stage. Details are given in Section 3.1, where we also give a precise economic interpretation to the abstract entities introduced here. Information in the game is incomplete as the outcome function π (.) is unknown to the agents. Agents are risk-neutral, so they care about the expected payoff. Hence, bank i will only be concerned with its payoff functions f i (a) = E (π i (a)).
The stage game Γ is repeated through discrete time, running from t = 0 to (potentially) infinity. The action profile chosen in stage game t is denoted by a (t) = {a 1 (t) , a 2 (t) , ..., a N (t)}. A particular realization of the payoff vector drawn from π (a (t)), is indicated by y (t) ∈ R N , which is therefore also called the "game-t payoff".
Monitoring is incomplete. At the beginning of (stage-) game t, each agent i knows the following: all its own previous choices and realized payoffs, and some statistics of other's past choices a −i (k). A (observed) history (by i at time Let us call H t the set of all possible histories that i may observe up to t, and let us define H = ∪H t . Differently from the literature on repeated games, but more in line with that on evolutionary game theory, we assume that agents aim at maximizing immediate payoffs (instead of e.g. the discounted stream of payoffs). That is, histories are essential to learn about payoffs and about others' actions, but agents disregard strategic spillover effects between stage games. This seems a sensible assumption here: the complexity of the environment makes it unlikely that agents anticipate all interactions. 4

Information, learning and strategies
Agent i faces two forms of uncertainty: uncertainty about the payoff function given others' actions, and uncertainty about other's actions. The first element gives to our model a flavour of decision theory, the second one is a game theory issue.

Information
As time goes by and histories are updated, agents can be seen to accumulate information. More formally, we posit that of the whole history observed up to t each i retains some multi-dimensional statistics, say ℘ i (t). These are the beliefs about the state of the environment that i is learning, and it constitutes the basis for the definition of strategies. Here, ℘ i (t) is composed of two parts: a) an "estimate" f t i (.) of the payoff function f i (a) = E [y i |a ]; 5 b) an "estimate" p t i (.) of probabilities for other agents' actions in the next stage game.
Of a whole action profile a, i only observes its own action a i and a statistic a −i which correlates with a −i . Hence, we assume that the estimate f t i (.) assigns to each (a i , a −i ) an expected payoff. As for the estimate b), each i is assumed to maintain static expectations about others' actions. That is, i believes that a −i is drawn from a time-invariant distribution, as if other agents were adopting a constant mixed strategy. We adopt this assumption, a classic in evolutionary game theory, because it is simple and because it yielded the same results as some more sophisticated forms of beliefs. 6 Because action profiles that generate the same statistic a −i are indistinguishable to i, the estimate p t i (.) also refers to a −i instead of a i . In the simulation, we posit that a −i is the average action of the "other" agents, which clearly takes values in [0, K]. So, approximating to the nearest integer, p t i (a −i ) is a vector with K entries, collecting the probabilities of any of the (other agents') average action being played.

Learning
The information stored in f t i (.) and p t i (.) is updated as time goes by, according to learning rules. A learning rule for agent i, denoted by Λ i , assigns to each observed history h t−1 i an updated ℘ i (t). Define I k (a i , a −i ) as the indicator function equal to 1 if action profile (a i , a −i ) appears at time k and zero otherwise. We use the following learning rule: In words, Similarly, the components of the vector p t i (a −i ) are calculated according to the observed frequencies, starting from an initial estimate 1/N . This is known as the "fictitious play" updating rule starting from a uniform estimate; it corresponds to Bayesian updating of beliefs about a constant, unknown distribution over the other agents' actions. 7

Strategies
A strategy for i is a map assigning to each ℘ i (t) an action to be taken, i.e. some a i (t). A particular strategy can be seen as motivated by some "rationale", resting in turn on the basis of a learning process which we now describe.
Each i is risk-neutral and aims at maximizing the expected immediate payoff. Because i believes that the opponents play a particular a −i with probability p t i (a −i ), its strategy dictates: The fact that banks maximize their immediate payoff is only one of the many possible preference specifications. Alternatively, agents might also be 6 We explored in particular the possibility that players believe that the opponents' actions follow a Markov process. In this case, the estimate under 2) is a transition matrix, containing the probabilities of a particular a −i being played at t + 1, conditional on a = (a i , a −i ) being observed at t. 7 See e.g. Fudenberg and Levine (1998) pg. 31 for details.  Figure 1: Information, learning and strategies taking into consideration future payoffs. In this case, however, optimal strategies would be far more complex. Indeed, discounting expected future payoffs would create an implicit trade-off between exploitation (the use of actions that appear optimal in the light of the available information), and exploration (the use of seemingly sub-optimal actions, which might appear such because of lack of experimentation). Our preference specification severs this payoff-related link between stage games, which nevertheless are interrelated because learning takes place across them. This short-sighted maximization assumption is common in the bounded-rationality and evolutionary game theory literature. 8 Figure 1 illustrates the relationship between histories, information and strategies. A history up to t − 2 is summarized in ℘ i (t − 1). This, along with the new data obtained in t − 1, is updated into ℘ i (t) by the learning rule Λ i . In turn ℘ i (t), which is the information available at t, is mapped by a strategy s i , to an action a i (t).
It should be noted that in early repetitions of the stage game, p t i is heavily influenced by the initial (arbitrary) estimate, for which we simply use 1/K, while f t i (.) is the average of a few observed payoffs only. Hence, strict adoption of Eq. 3 would most likely yield, and possibly lock into, sub-optimal actions. To avoid this, we suppose that agents first randomly choose a certain number of actions to explore the environment, and then start making choices as in Eq. 3 -which we call "informed decisions". To ensure further exploration, each agent also tries itself out at least once every a −i that it encounters. This models learning from other agents.
These choices on the length of the "exploration phase" are evidently arbitrary; however, in the model there are clearly no exploration costs, so the length of the exploration period can indeed be assumed exogenously. On the other hand, some limit to exploration must be imposed, as the sheer size of the action spaces inhibits a brute force approach, whereby i collects a very large sample of all possible action profiles (and respective payoffs) before making informed decisions. 9

Specification of the payoff function
The model of learning about an unknown stochastic payoff function that is determined party by the agent's own actions and partly by the actions of other agents can lend itself to a number of applications. The specification of the payoff function f i ties it to the problem of a payment system analyzed in this paper.
One possible specification of f could be a simple analytical function of the players' actions. The problem would then become that of analyzing the limiting behaviour of the learning rules and strategies, something that could be done analytically, provided f is simple enough. However, in quest of increased realism in payment system modelling we specify f via an algorithm representing a "settlement day" with a large number of daily payments. To understand why realistic analytical functions are difficult to develop, consider the following: imagine first that banks have always enough liquidity to make payments instantaneously. In this case payments flow undisturbed, delay costs are zero, and only liquidity costs matter. Their calculation is trivial. However, if banks commit less funds for settlement (as banks want to minimize costs), it becomes more likely that the funds are at some point insufficient for banks to execute payments immediately. As shown in Beyeler et al.. (2006), these liquidity shortages cause payments to occur in "cascades", whose length and frequency bears no correlation with the instruction arrival process that regulates payment instructions as the settlement of payments becomes coupled across the network when incoming funds allow the bank to release previously queued payment. As a consequence, the flow of liquidity and thus delay times for individual banks become largely unpredictable.
In the model a i represents any external funding decision by the bank. The funds allow the bank to execute payment instructions, which the bank receives throughout the day according to a random process. Banks have costs for both committing liquidity for settlement, and from experiencing delays in payment processing due to insufficient funds. The settlement day is modelled in continuous time, with time indexed as t ∈ [0, T ]. 10 At any time interval dt, bank 9 In the simulations, each i chooses among 40 possible actions, and 40 are the possible average actions by the "others" (a −i ). Thus, full exploration would require observing 40 2 = 1600 different action profiles (a i , a −i ), each of which should be sampled enough times to obtain a reliable estimate of f (.). 10 In the previous section, t indicizes "days", but we feel there is no risk of confusion, as Section 2 and the present are relatively independent.
i receives an instruction to pay 1 unit to any other bank j with probability 1 N 1 N −1 dt. Because there are N such banks i, and N − 1 "other" banks j, the arrival of payment instructions in the whole system is a Poisson process with parameter 1 so that, on the average day, T payment instructions are generated.
Payments are executed using available liquidity; i's available liquidity at time t is defined as: where x i (s) (viz. y i (s)) is the amount of i's sent (viz. received) payments at time s. For simplicity, we assume that every i adopts the following payment rule: 11 at each t, execute instructions using First-in-First-out (FIFO) as long as l i (t) > 0; else, queue received instructions (4) We assume that a payment instruction received by bank at t and executed at t ′ carries a cost equal to where κ is the "daily interest cost" of delaying payments. Similarly, liquidity costs (e.g. opportunity cost of collateral) are linear: Finally, the stage game payoff is the sum of the costs in Eq. 5 and those in Eq. 6, the former summed up over all i ′ s delayed payments.

Parameters and equilibria
The continuous-time settlement day is modelled as a sequence of 10 4 time units indexed t ∈ [0, 10 4 ]. Given that the arrival of payment instructions is a Poisson process with parameter 1, on average banks receive a total of 10 4 payment instructions per day. A sequence of days (stage games) is called a play. In the simulations, we terminate a play when no bank changes its liquidity commitment decision for 10 consecutive days (convergence). We run 30 plays for each set of model parameters and find that convergence always occurs.
Banks start the adaptation process with random decisions for liquidity, and gradually accumulate information on the shape of the payoff function. When enough information has been collected, banks adopt the rule described in Eq. 3 for making decisions on liquidity to commit. A series of stage games is ended in the simulations when no bank changes its collateral posting decision for 10 consecutive games. This means that at this point, no bank wishes to change its action, given the information available and given other banks' actions. 12 Suppose that the payoff function were known by the banks; given our specification of strategies, it would then be clear that the converged-to actions are a Nash equilibrium of the stage game. 13 We cannot quite draw the same conclusion in our setting: the payoff exploration is necessarily partial, so it might be that some profitable actions were never tested enough to be recognized as such. Hence, the equilibria converged to are only "partial"-Nash equilibria, or Nash-equilibria conditional on the "partial" information that banks have about the payoff function. However, as we discuss later, we observe a clear consistency in learning. This suggests that the partiality of the information collected is sufficient, and the equilibria reached are probably good approximations of the true stage-game Nash equilibria.
The base system consists of 15 banks. In section 3.2 we investigate the impact of the system size. Banks choose their action, a i among forty different levels, ranging from 0 to 80 in intervals of 2. The cost functions are as in Eq. 5 and Eq. 6. We normalize liquidity costs at λ = 1 and look at different values of delay costs κ ranging from 1/8 to 512 in multiples of 4. We are interested in the demand for liquidity (i.e. in the choices of a i ) at different values of κ, and in the resulting settlement delays and payoffs.

Base experiment
As expected, with low delay costs banks tend to commit low amounts of liquidity (∼50 units) and delay payments instead, and at high cost of delay bank prefer to commit plenty of liquidity (∼1044 units) in order to avoid expensive delays. We find that convergence always occurs -on an aggregate level within a narrow range. A priori, learning might be sensitive to initial observations, and hence it might be subjected to drastic differences in the final "conclusions". The consistency of the learning process is illustrated in Figure 4, where we plot the converged-to value of a i (i.e. the total liquidity committed) across plays, for different parameter specifications. Due to randomness -which makes histories necessarily different -the "learned" liquidity level a i clearly differ, but they do so within small ranges. 12 While some changes in actions may occur due to the randomness of payoffs and learning, these did not qualitatively change the results in simulations with longer convergence criteria. 13 This simple property of Fictitious Play stems from the fact that, if for all t > t ′ the action profile is some constant a, then the estimates e p i converge to the true value 1 N Σa i . Strategies prescribe playing a best reply to e p i so, if a were not a Nash Equilibrium, sooner or later one player would choose some a ′ i = a i .  It should be noted that while the system consistently "learns" the same level of total liquidity, this can represent many configurations of single banks' liquidity choices. Hence, our simulation don't show that always the same equilibrium is reached; rather, that the equilibria that are reached are characterized by a narrow span of total liquidity in the system. Given the symmetry of the model, it is clear that for any equilibrium (i.e. any equilibrium profile of actions (a 1 , a 2 ...a N )), there are many other equilibria obtained via a permutation of the actions between the players that yield to same total liquidity on the system level.
Another interesting feature of the model is its ability to match a well known empirical fact: a low ratio of available liquidity to daily payments ("netting ratio"), which in turn implies high levels of liquidity recycling. Because the system processes on average 10.000 payments a day, the above results imply that the ratio in our simulation is between 0.5% and 10.4%. For comparison, CHAPS Sterling's netting ratio is 15% (James 2004) 14 and in Fedwire as low as 2.2%. 15 The real netting ratios are bound to be higher due to the fact that payments in them are of varying sizes in contrast to the more fluid unit size payments modelled here. Figure 5 shows the equilibrium demand for intraday credit as a function of the cost ratio. This function is S-shaped in the exponential delay cost scale, that 14 Calculated as the ratio of collateral used for intraday credit to the value of payment settled. 15   is, it is relatively flat at both low and high levels of delay costs. At comparatively low delay costs banks evidently commit little liquidity; hence the return for increasing liquidity holdings are high, and so a little more liquidity suffices to cope with increased delay costs. As a consequence, for low delay cost levels the demand curve is flat. Consider now the situation with high delay costs. There, the liquidity committed is high and returns to increasing liquidity are low, so one might think that an increase in delay costs calls for high extra amounts of liquidity. However, this is not the case, because gains from liquidity indeed diminish above a certain level when all payments can be made promptly. Hence, for high delay costs, liquidity demand is insensitive to further increases in delay costs, and the demand curve is flat again. In between these two extremes, the demand for liquidity increases exponentially with delay costs. We find that delays in the system increase exponentially as banks reduce the amount of liquidity when this is relatively expensive compared to delaying payments. The phenomenon is known as "deadweight losses" (Angelini 1998) or "gridlocks" (Bech and Soramäki 2002) in payment systems. Figure 6 shows the relationship between system liquidity and payment delays. In intuitive terms, the reason of this exponential pattern is the following. First, a bank that reduces its liquidity holdings might have to delay its outgoing payments. Second, as a consequence, the receivers of the delayed payments may in turn need to delay their own payments, causing further downstream delays and so on. Hence, a decrease of a unit of liquidity may cause multiple units to be delays. Third, such a chain of delays -and hence this multiplicative effect -is more likely and An interesting question is how good the performance of the banks is in absolute terms. To understand this we compare the payoffs received by the banks through adaptation with two extreme strategies: a) all banks delay all payments to the end of the day; b) all banks commit enough liquidity to be able to process all payments promptly. 16 The comparison between the performance of these two pure strategies and the learned strategy is shown in Figure 7. For any cost ratio, the adaptive banks obtain better payoffs than any of the two extreme strategies -except for the case with high liquidity costs when the costs are equal. Banks manage to learn a convenient trade-off between delay and liquidity costs. On the contrary, the strategy under a) becomes quickly very expensive as delay costs increase, and the strategy under b) is exceedingly expensive when delays are not costly.

Impact of network size
In order to investigate the impact of system size on the results presented in the previous section, we ran simulations varying the number of participants. To ensure comparability, we kept the number of payments constant across simulations We observe that liquidity demand increases with the system size, and the increase is more pronounced the higher the delay costs. For example, the demand function is unchanged at low delay cost while, for high delay costs, a 50-bank system requires 215% the liquidity needed in a 15-bank system.
Similar results hold about delays. The relationship between liquidity committed and delays remains close to exponential irrespective of system size; however, larger systems experience more delays, for any level of initial liquidity (see Figure 9).
An intuitive explanation of these phenomena could be the following. First, note that if the number of participants is increased by a factor x (keeping turnover constant), the volatility of the balance of each bank is multiplied by a factor 1/x ′ > 1/x -we show this in a moment. Second, suppose that i) the optimal a i is proportional to the volatility of a bank's balance δ (i.e. a i = zδ) 17 and that ii) banks post all the same amount of liquidity (i.e. a i = a j ). It then simply follows that the total amount of liquidity increases with the system's size: (nx) z δ x ′ > nzδ (here nx is the number of banks in the larger system, and δ x ′ the corresponding volatility of balances).
The key point is that, if the number of participants is increased (keeping turnover constant), the volatility of banks balances rises more than proportionally. To see why this is the case, consider the simplified but illustrative situation where liquidity is abundant, so there are no delays. In this case, a bank's net position is the sum of a series of random perturbations (incoming and outgoing payments), equally likely to affect it positively and negatively. In other words, a bank's net position is a random walk, whose value after n perturbations averages zero, with a standard deviation √ n. By increasing the system size by a factor x, the orders are distributed over more banks, so the average number of perturbations for any given time interval is multiplied by 1/x < 1. Accordingly, the standard deviation of the balances at the end of any time interval is multiplied by 1/x ′ = 1/x > 1/x.

Throughput guidelines
Some interbank payment systems have guidelines on payment submission jointly agreed upon by the system participants 18 . The rationale for throughput guidelines is to induce early settlement in order to e.g. reduce operational risk or perceived coordination failures among participant. For example, if a large chunk of payments are settled late in the day, an operational incident would be more severe as more payments could potentially remain unsettled before close of the payment system and the financial markets where banks balance their end-of-day liquidity positions. We simulate a particular realization of throughput guidelines by introducing an additional penalty charge for delays that last longer than one tenth of the settlement day (i.e. 1000 time units). The penalty charge is set to 64, in order to sufficiently penalize non-compliance with the rules. Figure 10 shows the impact of the throughput guidelines on the amount of liquidity committed by the banks. When delay costs are high, banks already commit enough liquidity to avoid long delays, so the throughput guidelines have no effect. They do however, in the case of low delays costs, induce banks to commit more liquidity. Not surprisingly, this comes at a cost to the banks, which are forced away from their first-best choice. The increase in costs are of the order of 70% at the lowest level of delay costs, and 20% at the second lowest. The payoff comparison is shown in Figure 11.

Operational incident
Short term outages by banks in the payment system are rare in actual payment systems, but do take place occasionally. In a typical scenario a participating bank experiences problems connecting to the system due to temporal unavailability of IT systems or telecommunication facilities. Due to the design of the payment systems, a disconnected bank can in such situations generally still receive payments to its account at the central bank, but cannot submit instructions to pay from its account. Unless other banks stop paying to the troubled bank, it quickly becomes a liquidity sink, and the liquidity available for settling payments at other banks is reduced. 19 In this set of simulations we ask the question of how much liquidity banks would wish to commit in such a situation, i.e. what is the impact of an operational outage on the demand for intraday credit. The banks are assumed to be unaware of the possible incident, and unable to discriminate among their counterparts, so the intraday liquidity management rule under Eq. 4 is still adopted. Under these assumptions, we simulated a scenario where a randomly selected bank can receive, but cannot send payments for the first half of the settlement day. On average, this means that up to T /2N = 10.000/(2 · 15) ≃ 333 liquidity units cannot be used by other banks as a source of liquidity 20 . Depending on the delay cost, this figure varies between 1900% and 30% of the average total liquidity injected in the system at the beginning of the day (the first figure being for the case when both delay cost and liquidity demand are low, and the second for when costs liquidity demand are both high).
We found that the effect of operational incidents on the demand for liquidity is highest at a relative delay/liquidity cost ratio of 2 -hence fairly low in the range; at this point, the increase in intraday credit demand is 144 units, or an increase of 85%. It should be noted that banks do not compensate for the full amount of liquidity "trapped" by the distressed bank, but prefer to partly make up for that, and partly increase delays. For higher delay costs, delays remain approximately unchanged compared to the scenario without the incident. Finally, when delay costs are lower than liquidity costs (i.e. for a cost ratio <1), banks prefer to hold about the same amount of liquidity as without the incident, and experience the delays caused by the reduced liquidity. In this case, the impact of an operational incident increases both the demand for liquidity (but less than what was trapped) and delays -more so the one which is less costly.

Summary and conclusions
In this paper we developed an agent-based, adaptive model of banks in a payment system. Our main focus is on the demand for intraday credit under alternative scenarios: i) a "benchmark" scenario, where payments flows are determined by the initial liquidity, and by an exogenous arrival of payment instructions; ii) a system where, in addition, throughput guidelines are exogenously imposed iii) a system subject to operational incidents. It is well known that the demand for intraday credit is generated by a tradeoff between the costs associated with delaying payments, and liquidity costs. Simulating the model for different parameter values, we were able to draw with some precision a liquidity demand function, which turns out to be is an S-shaped function of the delay / liquidity cost ratio. We also looked at the costs experienced by the banks, as a function of the model's parameters. By the process of individual payoff maximization, banks adjust their demand for liquidity up (reducing delays) when delay costs increase, and down (increasing delays), when they rise. Interestingly however, the absolute delay cost remains approximately constant when the ratio delay/liquidity costs changes. As expected, the demand for intraday credit is increased by an operational incident. However, this effect is found to be important only if liquidity is costly compared to delaying payments. Likewise, throughput guidelines increase the demand for intraday credit -as banks try to avoid penalties for not adhering to them. In total this reduces the payoffs of the banks. Nevertheless, throughput guidelines may be beneficial when additional benefits that are not in the current model are taken into account (among these, benefits related to reducing operational risk). This model produces realistic behaviour, suggesting that it may be used to investigate a wide array of issues in future applications. A number of extensions are possible. First, alternative specifications for the instruction arrival process may be applied (see e.g. ). Alternatively, one could change the assumptions on the banks' network: while the complete network assumption implicitly adopted here fits well with e.g. the UK CHAPS system, an interesting question is how other topologies such as a scale free network topology such as in Fedwire (Soramäki et al.. 2007) would affect the results. Also, different individual preferences could be investigated. We assumed that banks are risk neutral and interested in maximising their immediate payoffs; it would be interesting to verify if the introduction of risk aversion and / or preferences over expected stream of payoffs may change the results. Finally, more complex behaviour can be easily studied within our model; for example, the "pay-as-much-as-you-can" rule for queuing payments could be replaced by sender limits. Similarly, more sophisticated strategies can be easily modelled, supposing e.g. that banks keep constant their actions for a number of periods (to gather more data and explore the environment), instead of exploiting after a fixed amount of time what seems to be the best action.


The Determinants of Deprivation in Jordan: Empirical Study

The objective of this study was to determine and explain the factors that affect deprivation in Jordan. To do so, this study constructs and tests a model that determines the factors, which affect deprivation. It employs an econometric analysis to examine the relationship between some main socioeconomic variables and the status of deprivation in Jordan. It looks at how changes in income, unemployment, education, health, housing conditions and access to services, as well as pollution, will affect the status of deprivation. The study uses the raw data of the national Household Income and Expenditure Survey HIES, which was conducted by the Jordanian Department of Statistics during 2002/2003 and covered 12,792 households. The study concludes that deprivation was caused by low income, unemployment, low educational attainment, bad type of housing, barriers to essential services, poor health and pollution. However, the effect of these factors varies. Simulation results of the model predicts that if income deprivation, unemployment and education deprivation are reduced by 1% the overall deprivation index will decrease by 0.7%, holding other variables without change. Realizing such reductions, however, will require policies to further increase wages and salaries, encourage investment in human capital and job creation.

INTRODUCTION
There has been an increasing interest in studying deprivation as an alternative to poverty which is an abstract measure, commonly expressed by monetary terms. Unlike poverty, deprivation is a more complex term that combines monetary and non-monetary indicators to define the deprived into more detailed aspects or domains such as deprivation of income, deprivation of education, deprivation of health and so forth. As such, deprivation measures can be used as an effective measure to justify or evaluate economic policies directed to help the poor getting out of their despair and misery.
Though 'poverty' and 'deprivation' have often been used interchangeably, many have argued that a clear distinction should be made between them. The condition of poverty means not having enough financial resources to meet needs. Deprivation on the other hand refers to unmet need, which is caused by a lack of resources of all kinds, not just financial. The terms 'poverty' and 'social exclusion' have also been used on occasions interchangeably. Townsend 1987 argues that 'people can be said to be deprived if they lack the types of diet, clothing, housing, household facilities and fuel and environmental, educational, working and social conditions, activities and facilities which are customary…' People are in poverty if they lack the resources to escape deprivation. [1] Townsend elaborates distinctions between social and material deprivation. The former -which he acknowledges is more difficult to measure -he describes as 'providing a useful means of generalising the condition of those who do not or cannot enter into ordinary forms of family or other relationships'. The more easily measured material deprivation relates to diet, health, clothing, housing, household facilities, environment and work. By identifying both social and material deprivation, he is anticipating some aspects of what one might now call 'social exclusion'. In this study Townsend also lays down the foundation for articulating multiple deprivations as an accumulation of several types of deprivation. [2] Though Townsend's work mainly though not entirely referred to individuals experiencing deprivation -single or multiple -the arguments can, in modified form, extend to area based measures. However, limitations of data availability inevitably cause some of the sophistication of his original concept to be lost in practice. Moreover, it could be argued that measures of consumption are themselves problematic as lack of certain items may be by choice rather than inability to pay for them. [3] More recent studies have moved away from measuring and analysing poverty to measuring deprivation. [4] In Jordan, poverty and deprivation remain the daily experience of many citizens. Large numbers of the disadvantaged live in rural areas, yet most research attention has been focused on poverty as expressed only in monetary terms. Recent macroeconomic studies that addressed poverty in Jordan are few. [5][6][7][8][9][10][11][12] In addition, there is only one study that focused on measuring the level of deprivation but not on the factors that determine deprivation. [13]

MATERIALS AND METHODS
This study reviews relevant existing studies on deprivation including those related to Jordan and examines the raw data provided by the Household Income and Expenditure Survey HIES of 2002/2003 to measure the effect of seven variables on deprivation. The dependent variable is a specifically created composite measure of deprivation using household survey data from Jordan. All independent variables are also indicators, expressed in percentages, which are composed of a number of indicators. Measuring different aspects of deprivation and combining these into an overall multiple deprivation measure raises a number of questions. Perhaps the most important one is which indicators should compose a certain deprivation domain. In fact, there is no easy answer for such question except consulting previous studies. Following deprivation studies in England [14][15][16][17][18][19][20][21][22] , Wales [23] , Scotland [24] , Ireland [25][26] , South Africa [27] , India [28] and New Zeeland [14] , this study applies seven domains and 26 indicators. Each domain is a weighted average of certain simple rates. These rates represent the proportion of deprived households members to total households members. In other words, domains are derived by combining deprivation indicators. For each governorate, a certain domain say income domain is computed as a weighted average of simple rates of deprived households to total households, as follows: Where D represents any domain such as income domain, W i is the weight of governorate i which is the total number of households in that governorate divided by the total number of households in Jordan, DH is the number of deprived households, TH is the total number of households, and l is the number of indicators. For some domains such as education and health domains, as seen in Appendix 1, the domain is computed as the weighted average of simple rates of deprived individuals to total number of individuals at the same age. Obviously, At the first phase, the model tests the effect of each independent variable on the overall deprivation index applying the ordinary least squares, OLS, method on a simple linear model. This is done to see which variables can affect deprivation more than others. Statistics such as the determination coefficient R 2 , the computed t values, and the level of significance of β are obtained as a prima-facie result aiming at selecting independent variables. These results are shown in Table 2.
The second phase involves a multiple linear regression model. The method of estimation applied is the Stepwise regression method assuming a probabilityof-F-to-enter ≤ 0.050 and a probability-of-F-to-remove ≥ 0.100. Regression results are presented in Table 3.
In the third phase, the effectiveness of some policy measures aimed at reducing deprivation in Jordan are assessed. The effects of these policy changes are evaluated through a simulation model which applies a traditional simulation technique to measure the effect of a one-unit decrease in the most important socioeconomic variables on the overall deprivation. The model introduced five scenarios. The exogenous variables of the five models were decreased using the hypotheses summarized in Table 4.

Sample of the study:
Empirical results and conclusions of this study are based on the raw data of the Household Income and Expenditure Survey HIES Questionnaires 1 and 5 which was conducted by Jordan's Department of Statistics. The HIES of 2002 covered a sample of 12,792 households using two-stage stratified cluster sampling technique designed to give reliable estimates of socioeconomic variables at the sub-district level.
The quality of data raised two issues. The first is related to the degree of accuracy of data collected by the Department of Statistics through a sample survey. Obviously, it would be naïve to regard all household data as being free of errors in absolute sense. Rather, they are constructs, worth knowing, and of special value when they are compared across regions. Given the large number of households, the distribution of these households, and the sampling methodology, one can safely assume that the HIES was a representative socioeconomic survey of the living standards of households in all governorates of Jordan. The second issue is concerned with the inclusion or exclusion of some socioeconomic variables. For this issue, there is no theoretically accepted set of indicators to construct deprivation indices.
Deprivation in economic theory: Many theories have been constructed to assess the macroeconomic relations between deprivation and economic growth. The causes of deprivation are open to broad debate. Several factors have been blamed for deprivation including economic structure or system such as capitalism, socialism or communism, ongoing or past wars, and individuals' different abilities to create wealth. This suggests that socioeconomic policies, including economic adjustment programmes, alone cannot fully explain the changes in deprivation, but the matter is actually much more complicated, yielding no easy or general answers.
Economic theories that dealt with this issue postulate that deprivation is often brought about more by domestic profligacy in matters of subsidies to the rich, salaries for the bloated public sector, and military extravaganza. Bardhan 2005 argued that when governments are faced with mounting fiscal deficits they often find it politically easier to cut the public expenditures for the voiceless poor and that is primarily due to the domestic political clout of the rich who are disinclined to share in the necessary fiscal austerity. Percentage of unemployed members to total population at the same age group Note: All variables with 3-digit code are from Questionnaire 1 while all variables with 5-digit code are from Questionnaire 5 He adds that "it is always convenient to blame an external agency for a problem that is essentially domestic in origin." [30] Among other factors that impact deprivation are low income, unemployment, low educational achievements and bad housing conditions. Recent research also suggests that the degree of deprivation in society may be related to poor health or lack of access to services. Until the issues of deprivation are satisfactorily resolved, deprivation is bound to raise anxiety and hostility, reduces social cohesion and increases social unrest, thereby weakening the society. There is also a concrete evidence that deprivation motivates the poor to engage in crime, riots, and other disruptive activities. [31][32][33] Domains and indicators: With the existing data, deprivation is only composed of seven domains that comprise 26 indicators, as shown in Table 1. It is obvious that the analysis of more domains and indicators, disaggregated clearly, deserves further research. The model contains seven domains which relate to: * Income derivation * Employment derivation * Education deprivation * Health deprivation and disability * Barriers to services * Barriers to housing Accommodation * Living environment deprivation Pollution Most deprivation indicators assume that there is a broad consensus on what types of goods and services families should be able to afford, and that an inability to afford those items implies deprivation.
On the other hand, each domain contains a number of indicators, totalling 26 overall, as shown in Table 1. As mentioned above, the criteria for determining the number of indicators in each domain are based on the availability of data and previous studies. These indicators should satisfy the following conditions: a. Domain specific, i.e., not used in more than one domain; b. Measuring major features of the domain and experienced by a sizable number of people or areas; c. Up-to-date; d. Capable of being updated in future HIES's; e. Statistically robust and consistent in definition.

The model:
The study postulates that deprivation is determined by seven exogenous variables as below D ij = fA ij , E ij , H ij , I ij , P ij , S ij , U ij for i = 1, 2, …, 12 and j = 1, 2, …, n i Assuming a multiple linear relationship and omitting the subscripts i and j, for simplicity, the assumed model can be written as follows: n i = Number of observations in governorate i; β's = Parameters to be estimated; ε = Error term which is assumed to has mean zero and constant variance.

RESULTS
We first examine the effect of each domain on the index of multiple deprivation. The OLS regression results of Table 2 reveals that all the coefficients of the seven domains have the expected positive signs and are significant at the 5% level, except for accommodation deprivation and pollution. For this reason, these two domains are excluded from stepwise regression in the second phase. Empirical analysis also produced interesting results towards the negligible effect of health deprivation domain in determining deprivation levels, as the coefficient of determination is below 50%.
The results of multiple regressions concerning the relationship between deprivation and socioeconomic variables, presented in Table 3, show that all of the coefficients are significant at the 5% level, except for services deprivation and health deprivation, as seen in Model V which includes 5 exogenous variables. In other words, there is little effect of both services deprivation and health deprivation, but this effect is insignificant at the 5% level, as seen in Models IV and V in Table 3. This result is supported by the results of Model III. The signs of all coefficients, obtained from stepwise regression have the expected signs and significant at the 5% level, indicating that any form of deprivation affects positively the overall index of deprivation. In sum, using data from a national household survey, empirical findings indicate that the most significant factor in affecting deprivation is unemployment followed by education deprivation then income deprivation, as shown in Model V in Table 3.
Judging from the estimated models, we can conclude that, among the five models in Table 3, Model III can best explain the factors affecting deprivation. Furthermore, the strong statistical results of the regression analysis give strong indication that the model is correctly specified. Since the estimates are derived from cross-section data, no test for serial correlation of residuals is needed, and naturally no lags can be introduced in the model.

Simulating the effects of deprivation reduction efforts:
Having estimated the model, simulations are run to predict the changes in deprivation levels that will result from postulated changes in the main socioeconomic variables. Obviously, a large number of simulations can be introduced. However, we are interested to see the effect of one-unit change on deprivation levels. Table 4 provides simulation results, based on few possible changes in income growth, employment potential and education. Based on these simulations, decreasing income deprivation appears to provide the most important avenue for reducing deprivation. More precisely, a decrease in income deprivation i.e., an increase in income by 1% will decrease the overall Pollution and accommodation deprivation variables are excluded from the models because the prima-facie regression results, shown in Table 2, indicate that their coefficients were statistically insignificant at the 5% significance level. deprivation index by about 0.35% to 0.39%, as seen in Models II, IV, and V. The second important decrease in the overall deprivation may result from a 1% decrease in unemployment i.e., 1% increase in employment. This decrease could reduce the overall deprivation by about 0.29% to 0.32%. The third important decrease in the overall deprivation may result from a 1% decrease in education deprivation. This decrease could reach 0.27%.
If each significant variable is decreased by 1%, the decrease in the overall deprivation could reach as much as 0.76%, as shown in Model III. Health and services interventions are shown to be less effective. However, the effect of 1% reduction in services and health variables, although insignificant, along with a 1% decrease in the above three significant variables could decrease the overall deprivation by 1.02%, as shown in Model V.
The importance of producing such simulations stems from allowing policy makers and planners to make a quantitative judgement of the likely effect on deprivation. Simulation results, presented in Table 4, are obtained by applying traditional static approach which is usually applied in simulation models which deal with mean-value estimations of assumed functions. At the same time, there are certainly situations when the most pessimistic or optimistic scenarios have to be considered.

CONCLUSION
This study has concentrated on analyzing and modelling the determinants of deprivation in Jordan. Empirical results, obtained from using five models, point to six main conclusions: First, the findings lead quite clearly to the importance of decreasing income deprivation which is not coincidental. In fact, much of the Jordan's economic malaise was the result of policies that perpetrated disincentives to produce income and allocate resources efficiently.
Second, it is fair to conclude that the Jordanian economic and social policies directed towards the reduction of deprivation should concentrate on a reduction in unemployment.
Third, is a need to adopt a policy that includes reallocation of public expenditures for education rather than other services. In other words, there is a need for an active policy of investment in developing human capabilities including universal and high quality education.
Fourth, concentrating on improving health services and enhancing pollution environment will decrease deprivation but with a relatively minimal effect. Although health programmes are often advocated on humanitarian grounds, they also represent investments in human resources that have payoffs for both the recipients and society.
Fifth, reducing deprivation requires a major social transformation and real structural changes, not marginal tinkering and ad hoc reformist palliatives. Structural changes are more than mere financial and budgetary discipline and fragmented welfare and safety nets for the poor.
Sixth, an economic policy to reduce deprivation should look at deprivation as a multidimensional approach which implies giving attention to empowerment and reducing livelihood insecurity as well as maximizing income growth, educational attainment and employment. A sustainable deprivation reduction strategy needs to search for alternative driving forces for a self-sustaining accumulation process. This is not a matter of merely giving credit to the poor on delivering fragmented services. It is a matter of embarking on a new pattern of growth with the poor saving, even at low levels of income and learning first to transform their efficiency and work into assets. Naturally, effective implementation of economic policies concerning deprivation reduction is more likely to succeed when there is regular monitoring, evaluation and revision of economic strategy.
Finally, it should be emphasized that these policies are neither easy to implement nor guaranteed to alleviate deprivation or other economic woes. They are only the framework which would maximize the opportunity to reduce deprivation.