The Payment System: Design, Management, and Supervision
Theodore E. Umhoefer - Senior Vice President-Financial Services
Published December 1, 1994 | December 1994 issue
Edited by Bruce J. Summers
Published by the International Monetary Fund
While issues relating to prices (usually skyrocketing), labor (strikes and strife), and supply (shortages and more shortages) get the big headlines in the economics stories about the former states of the Soviet Union, there is an underlying issue that is equally important, though perhaps less flashy: the need for a stable and secure system of making payments. As Alan Greenspan, Federal Reserve chairman, notes in the forward to this "how-to" book: An efficient payment system is essential to the financial infrastructure of an economy, and the development of that financial infrastructure is a top priority for formerly socialist countries moving to a market system.
It is the central bankers of those newly formed market economies to whom this book is primarily addressed. Published in both Russian and English, The Payment System is based on lectures prepared for a 1992 training program for central bankers from the states of the former Soviet Union. The Federal Reserve was one of the sponsors of the program, and Bruce Summers, the editor of this book, was then serving as the Fed's deputy director in the Division of Reserve Bank Operations and Payment Systems, and is now senior vice president and chief financial officer of the Federal Reserve Bank of Richmond.
But just because this slim volume was produced with East European central bank "rookies" in mind, doesn't mean there aren't lessons for other readers. The Payment System provides valuable insights for anyone interested in understanding the underpinnings of the payment system in free market economies. The proverbial blank sheet of paper that exists in the former Soviet Union provides a good backdrop to analyze the developed payments systems of the world, and to consider which characteristics and processes make the most sense and which are in place out of historical convenience. The seven general principles illustrated by Summers in his opening essay bear wisdom for both new and established central banks:
The first principle says that a payment system that relies on fiat money must have price stability. (Fiat money is currency that is not redeemable for a specific amount of a commodity, such as gold or silver.) The second principle holds that a nation's monetary regime plays a major part in designing the payments system; three through five involve technological and legal issues; the sixth general principle states that a payments system has "public good" characteristics that require oversight and supervision. Finally, because it does not pose credit or liquidity risks, "it is universally accepted that final interbank settlement is best accomplished by the transfer of balances held in accounts with the central bank."
By the nature of the subject matter, some of the articles are more technical than others, including discussions of legal issues, settlement systems among banks, and policy and technological choices faced by policymakers who must implement a new large value payment system. But even the most technical articles are of value to non-expert readers with an interest in this subject. In Payment System Risk and Risk Management, the authors provide an excellent primer on the types of risk inherent in large dollar payment systems and the various remedies that have been employed to manage those risks. The article makes the connection between the risks associated with individual transactions (credit and liquidity risks) and the broad-based systemic risks.
The relationship between cash, check and low-dollar electronic payments is described in "Small-Value Transfer Systems." This article lists the differences between the U.S. checking system and the European giro and Eurocheque. The authors stress that a market economy needs an efficient and versatile small-value payment system to fully meet the needs of all market participants.
The book also includes two articles on the role of the central bank as a regulator and participant in the payments system. In one of these articles, Jeffrey C. Marquardt, assistant director in the Division of Reserve Bank Operations and Payment Systems at the Federal Reserve Board, sums up the payment system's importance in an economy: "Financial markets and payment systems are mutually dependent upon one another in a monetary economy, and settlement practices in markets, and in some cases trading practices, depend directly on the design and operation of payment systems. Thus, payment system designs and operations must take into account the needs of financial markets and end users of the payment system in order to create the conditions for an efficient financial system and economy generally."