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• W3124159378 abstract "Abstract: What are the benefits provided by a payment system? What are the tradeoffs in public versus private payment systems and in restricted versus open payments arrangements? Modern payment systems encompass a variety of institutional designs with varying degrees of counterparty protection. We develop a framework which allows for an examination and comparison of payment systems and specification of conditions leading to their adoption. We relate these conditions to the design of present payment systems (Fedwire, CHIPS, Target, etc.). JEL classification: E400, G210 Key words: payment systems, limited enforcement, settlement risk 1 Introduction When trade is decentralized, and agents are not completely reliable, there can be temporary shortages of collateral so that spot transactions--transactions of goods against collateral--are not always possible. In such a case, payments systems become relevant, as the exchange of goods becomes temporally separated from the exchange of collateral. Payments systems become a means of economizing on the amount of collateral needed to enforce the pledges made. The world has seen a variety of payments mechanisms, under both public and private arrangements, centralized and decentralized. What are the optimal arrangements for such payments systems? This paper investigates an environment in which we can begin to address this question. We start by analyzing the development of a private arrangement for effecting payments. We consider the questions of membership in the organization, as well as requirements for monitoring and for the posting of collateral. We then consider a central bank-sponsored payments arrangement, where the central bank can exploit its taxation powers to back up its promises. We examine the advantages and disadvantages of including the central bank in the payments mechanism, and how its presence causes a system to change. Our analysis is most relevant for the design of large-value or wholesale payments systems. Traditionally, these systems are used to settle obligations between banks, as may arise from commercial transactions, the operation of small-value or retail payment systems (e.g., checks and credit cards), or from the need to settle financial market transactions. Fedwire (operated by the Federal Reserve) (1) and CHIPS (operated by the New York Clearing House) are the two preeminent payment systems in the U.S. (2) Large-value payment systems typically have a hierarchical structure. At the core of these systems is either a single institution (a central bank in the case of Fedwire and similar systems) or a relatively small group of institutions (as in the case of CHIPS) with special settlement privileges. A second level of the hierarchy has institutions which may access the system, but with restrictions on access such as position limits or additional collateral requirements. At the bottom of the hierarchy are institutions who are not members of the system or are customers of member institutions, both of whom clear and settle payments through member institutions. A principal focus of our analysis will be to understand the purpose of this hierarchical structure. In ordinary circumstances the operation of public and private payment systems is, at a practical level, much the same. There are, however, some notable differences in the legal and institutional underpinnings of public versus private arrangements. These distinctions, largely inconsequential during normal times, can give rise to critical distinctions in the functionality of the two types of system during times of duress. The first such distinction is in the area of finality. A funds transfer over a public system typically represents an unconditional transfer of a claim on a central bank. As such, it unconditionally discharges an obligation, whereas a transfer of funds over a private system may not. For example, in the U. …" @default.
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• W3124159378 modified "2023-09-27" @default.
• W3124159378 title "Payments Settlement under Limited Enforcement: Private versus Public Systems" @default.
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