An economy of scope exists when there is a technological reason to produce
several goods or services jointly rather than separately. For example,
since jet fuel, gasoline, heating oil, lubricating oil and so forth are
all constituents of petroleum that are gotten by "cracking" the petroleum
into the separate constituents of its mixture, there is an economy of
scope in operating a refinery. It is obviously better to produce all of
these products jointly than to try to produce them separately.
In central banking, there could be an economy of scope between
a core function and a payments function outside the core. In such
a case, if the central bank performs the core function, the public
is well served (other things being equal) by having it perform
the additional function as well.
As an example, we are inclined to think that the Fed's Multilateral
Settlement Service enables depository institutions to take advantage
of an economy of scope between settlement services and risk management
services utilizing the Fed's Account Balance Monitoring System
(ABMS). The ABMS is a computer system that provides the option
to monitor, in real time, the reserve account of a depository
institution. This system is used for risk management of Fedwire,
the Reserve Banks' real-time gross settlement system for large-value
payments. Recently, the Federal Reserve established the Multilateral
Settlement Service, which enables check clearinghouses, credit
card networks and other entities to use ABMS for risk management
of their private (usually net settlement) payment arrangements.
Given that the Fed has already built ABMS and is operating it
for internal use, and that the incremental cost of granting access
to these other entities is small, there is an economy of scope
The economy of scope in this central-banking example is much
subtler than the one in petroleum refining. In fact, it is typically
true that careful statistical analysis is required to document
an economy of scope convincingly. When and if such an economy
of scope does exist, it provides a prima facie reason for a central
bank to expand its payments system activities in a particular,
targeted way beyond its core functions.
Even where an economy of scope may demonstrably exist, one must
weigh several questions before deciding that central-bank participation
in a payments market is the best form of policy. For example,
if the economy of scope were an artifact of regulation, then would
revising or removing the regulation be preferable to expanding
the role of the central bank? Does adoption of new technology
(such as movement from paper-based check collection to electronic
payments) remove an old economy of scope or create a new one,
and, if so, should the range of central-bank activities be adjusted?
We emphasize that an economy of scope is a threshold condition
for the central bank to examine judiciously whether it ought to
undertake an activity outside its core function, and does not
alone constitute an open-and-shut case for such activity.
Thoughts on the Fed's Role in the Payments