As the melange of changes associated with deregulation and advances
in technology work their way through local, national and international
financial communities, the providers of financial services, including
the Federal Reserve, will have to adapt their services even more rapidly
and more profoundly than before.
The internationalization of money markets, for example, poses questions
of legal and financial risk that must be dealt with by those providing
payment services. On the national level, the expansion of interstate ownership
of financial institutions has created a variety of new interbank relationships
whose impact on payments systems and the associated accounting systems
has yet to be determined. The technical community has contributed advanced
computer and associated communications capabilities that have changed
forever the speed and flexibility available to decisionmakers in financial
markets. Ninth District institutions, small and large, have strong competitive
motivation to accommodate and, if possible, capitalize on these new, challenging
realities of the marketplace.
Within that fast-moving environment the Federal Reserve marks its 75th
anniversary as an active and innovative provider of payments services
in the Ninth District, a district that differs from other parts of the
country in the large numbers and wide dispersion of small, independent
financial institutions that share the financial services markets with
the district's larger institutions.
The longstanding mission of the Federal Reserve, reinforced by the Monetary
Control Act of 1980, is to promote efficiency in the payments system by
assuring that economical, responsive services are available to financial
institutions and the public throughout the district and the nation. Toward
that end, our Ninth District staff have pioneered in the field of electronic
transmission of check and accounting data and have made a serious commitment
to the development of check truncation as a way to reduce the delays associated
with collection of paper checks, especially in areas distant from the
larger cities. Because of the long distances separating many Ninth District
institutions from financial centers, these electronic services offer many
Ninth District institutions particularly significant advantages in time
and cost over ground transportation. At the national level, the Federal
Reserve is experimenting with electronic check image transmission as a
further step in the evolution from the movement of paper toward electronic
transmission of payments information.
A number of other initiatives are afoot within the Federal Reserve System
to improve its capacity to deal with the changes in financial marketplaces.
Major improvements have been made over the last year in the reliability
of the computer mainframes that handle Federal Reserve electronic transmissions.
Considerable effort is likewise being devoted to the development of common
software to be used nationwide for the electronic connections between
Federal Reserve Banks and terminals at financial institutions. That will
ultimately speed the handling of electronic payments through Federal Reserve
hardware and software between financial institutions coast to coast. As
these systems are developed, our challenge will be to make available the
latest technology to handle the speed and volume requirements of the larger
institutions, while at the same time providing equally responsive alternatives
for smaller institutions whose lower volume requirements do not require
such costly equipment.
A serious challenge facing the Federal Reserve in the delivery of its
payments services is to find practical ways to reduce risks associated
with the huge payments, more than $1 trillion pay day, handled by Fedwire,
the Federal Reserve's high-value electronic payments system. One avenue
is to reduce the risk of hardware failure by investing in backup hardware
and logging systems that permit instantaneous recovery from equipment
outages. Another avenue is to reduce the risk associated with intraday
credit, the approximately $100 billion in daylight overdrafts that occur
when the Federal Reserve delivers final credit to the accounts of receiving
banks before the paying accounts contain sufficient balances to cover
those payments. The Federal Reserve is considering a number of steps to
reduce the volume and value of daylight overdrafts and to reduce the risks
associated with those that remain. Crucial to any of these steps is the
reliability and accuracy of the Fed's electronic transfer and accounting
The costs associated with fault-free reliability and effective emergency
backup are high and must be recovered in the prices charged for the services.
In the face of these unwelcome economic realities, the Reserve Banks are
seeking new ways to control or reduce those costs and the associated prices
we must charge. One potential cost control measure is to reduce the number
of mainframe computer installations used to process Federal Reserve transactions.
Feasibility studies currently under way indicate the possibility that
existing computer and communications technology might be capable of generating
sizable savings by handling electronic payments requirements through fewer
Federal Reserve computer processing sites.
The decade of the '80s, whose initial years included reexamination of
the Federal Reserve's role in the financial services business, unleashed
a lively mix of competitive energies both in the private financial services
industry and in the Federal Reserve. An equivalent or greater measure
of innovation and achievement will clearly be needed to guide the evolution
of the U.S. payments system, and its international counterparts, through
the challenges and changes of the 1990s. Federal Reserve staff, nationally
and in the Ninth District, are looking forward to contributing their best
efforts to that evolution.