Definition of a bilateral credit limit’
Bilateral credit limit is the daily limit that the two companies impose on each other in order to reduce their credit risk. When banks send large payments to each other, these payments may not clear until late in the day. Until that happens, the Bank receiving the payment at risk, if the Counterparty is unable to pay. Bilateral credit limit reduces this risk by limiting the amount of intraday, which can be paid.
The penetration of ‘bilateral credit limit’
The purpose of bilateral credit limits is to reduce the credit risk of each member institution to another, and to ensure the stability of the payment system overall in case one institution will not be able to meet its obligations.
System information centre interbank payments (chips) is a payment system in which bilateral credit limits established financial institutions. Payments into chips is done by netting. Another large payment system, Fedwire, also uses credit limits, although its resolution is known as real time gross settlement, not the weave.
In addition to bilateral credit limits, the payment systems usually have aggregate credit limits, which limit one institution’s intraday obligation to all members of the system together.