Another solution is multicurrency netting would

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Another solution is multicurrency netting- would reduce the need for final settlement by as much as 75% The Payment System and Public Policy Efficiency of the Payments System (min. transaction cost, competitive pricing, integration) Minimum Costs- o Significant externalities of financial institutions competing for payments may result in the need for gov. intervention to lower transaction cost. However, free competition may be able to promote the best results o For payment system to be efficient (lower costs) people need to use the lowest cost method- people don’t do this because consumers will choose lowest cost to them Competitive pricing- o Economies of scale and natural monopolies are a barrier to competitive pricing o Market power is a concern but the ability to exploit it is limited- raising price of one method of payment above competitive level will result in loss of business to other methods o Natural monopoly in note issue to central banks- Reason for gov. monopoly of note issue is not efficiency but revenue o Seigniorage- difference between the value of money and the cost of producing it Integration- o Lack of integration is the use of different currencies o Within country- domestic payments involve the conversion of one type of money to another too The Importance of Stability in the Value of Money- 4 TH EFFICIENCY REQUIREMENT THAT IS SPECIAL TO THE PAYMENT SYSTEM - stability in the value of money. Changes in value of money can increase the costs
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of delay dramatically- degrading efficiently of payment system. Two reasons of change to value of money = inflation and fluctuation Inflation- o Price level rises, value of money in terms of purchasing power falls. o Problem because holding the cash involves a loss o Inflation raises nominal interest rate- higher this rate the greater the costs of delay in payment, so the great the benefits – to the individual – to float Fluctuation in Exchange Rates- o Fluctuation in the rate of conversion – exchange rate – raises the cost of international payment by making it more risky Stability in Payment Systems- Efficiency is important but stability matters greatly more. Safety of Bank Deposits- o Payment system relies heavily on banks because banks provide bank money- the most important medium of payment Fedwire and Daylight Overdraft- o Safety of the large-value of online payment systems, Fedwire and CHIPS, is of great concern to fed o Daylight overdraft- overdraft that must be paid by the end of the day, no interest charged by fed. This does expose fed to credit risk CHIPS and Systematic Risk- o CHIPS relies on netting, it has a systematic risk- danger that failure of one participant in payment system could cause the failure of others. o Fed has urged CHISP to improve safety. Payment used to be provisional (bank could cancel payment by end of day) they are now final.
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  • Fall '19
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