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The Federal Reserve's Objectives Regarding the Payments System and Payment Services Provision

2000 Annual Report

Published April 1, 2001  |  April 2001 issue

The Federal Reserve Board of Governors articulated the Fed's payments system objectives in "The Federal Reserve in the Payments System," published in the Federal Reserve Bulletin in May 1990. Also known as the White Paper, this article states that "The Federal Reserve will continue to bring to payment markets an overall concern for safety and soundness, promotion of operational efficiency, and equitable access. Indeed, those considerations relating to integrity, efficiency, and access to the payments system will remain at the core of the Federal Reserve's role and responsibilities regarding the operation of the payments system." The three key words that signify the Fed's broad payments system objectives—integrity, efficiency and accessibility—have been repeatedly reaffirmed.

The White Paper and other Federal Reserve documents interpret more specifically what those three objectives mean. With regard to integrity, the White Paper not only offers "safety and soundness" as a synonym but also goes on to explain that "A reliable payments system is crucial to the economic growth and stability of the nation. The smooth functioning of markets for virtually every good and service is dependent on the smooth functioning of banking and financial markets, which, in turn, is dependent on the integrity of the nation's payments system." It cites payment breakdowns during the Panic of 1907 and in the wake of the 1974 failure of Bankhaus Herstatt in Germany as examples of financial disruptions that the Fed seeks to minimize. It suggests that the Fed's roles in providing a reliable interbank settlement mechanism and payments system access to failing institutions help prevent such breakdowns.

The White Paper does not explicitly define efficiency, but by implication and context it seems clear that a standard notion of economic efficiency is intended. Loosely speaking, this implies that the social cost of the resources used to provide the prevailing level of payment services cannot be reduced and that it is not possible to make everyone better off by least-cost provision of more or less of some payment services. In a dynamic economy, this also encompasses efficiency over time, including appropriate investment in new technologies and development of new services.

The Fed's goal of promoting access to payment services primarily refers to access by banks (defined to include thrifts, mutual savings banks and credit unions). As indicated in the White Paper and elsewhere, the Fed does not necessarily aim directly at promoting payments system access by consumers and nonfinancial businesses.* Instead it seeks to ensure that banks have equitable access to interbank payment services, in order that the banks in turn can make a broad range of payment services available on competitive market terms to U.S. consumers and nonfinancial businesses.

The White Paper explicitly ties the Reserve Banks' role as payments provider to the Fed's general payments system objectives. It states that "the role of the Federal Reserve in providing payment services is to promote the integrity and efficiency of the payments mechanism and to ensure the provision of payment services to all depository institutions on an equitable basis, and to do so in an atmosphere of competitive fairness." That is, the Reserve Banks engage in payments provision as a means of pursuing the Fed's overall payments system objectives.

Endnote

* The Federal Reserve is responsible for administering certain laws and regulations that deal directly with consumer and small business payment matters. However, the Fed does not have general responsibility or authority for ensuring consumer and nonfinancial business access to the payments system.

Return to: Thoughts on the Fed's Role in the Payments System

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