A Proposal to Rely on Market Interest Rates on Intraday Funds to Reduce Payment System Risk

Abstract

The appropriate balance between market-based and regulatory solutions is a problem with which the Federal Reserve has struggled, particularly during the past decade as the economy and payment system have become more global. Until now the Fed has focused primarily on regulatory solutions. I would like to outline the reasons for the struggle and compare a regulatory approach with a market-determined solution. I would also like to spend a little time discussing the use of the U.S. dollar as the key currency in the international payment mechanism and the lack of a meaningful intraday funds market. Before I start, however, I want to describe a trap that we in the public sector frequently fall into when addressing complex issues.