... most financial transactions “settle” with significant delay relative to trade time, with delays ranging from several hours for very-short-term (overnight) domestic claims to full or multiple days for transactions involving foreign exchange. These delays have significant policy implications, since they may give rise to payment congestions and increase the risk of gridlocks, which may transmit through the whole financial system and impair its efficiency...

In line with predictions
from recent models showing that financial claims are settled strategically, we document
a tendency by lenders to delay delivery of loaned funds until the afternoon hours. We find
that banks follow a simple strategy to manage the risk of account overdrafts—delaying
the settlement of large payments relative to that of small payments. More sophisticated
strategies, such as increasing settlement delays when own liquid balances are low and
when dealing with small trading partners, play a marginal role. We also find evidence of
strategic delay in the return of borrowed funds...