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 objectivesintegrity, efficiency
and accessibilityhave 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
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.
Thoughts on the Fed's Role in the Payments