Payments System Risk, Market Failure, and Public Policy

Abstract

There are a number of aspects of payments system risk which have recently been the focus of public policy. Everpresent are the operational risks of a computer hardware or software malfunction, such as the one that recently occurred at the Bank of New York and led to a $22.6 billion Discount Window loan, the largest in the history of the Federal Reserve. There are also risks of fraud from bank employees and customers; some of these risks are covered by private insurance. Then there are the standard credit risks banks take on a daily basis when they allow customers to use uncollected or provisionally credited balances prior to settlement. Lastly, there is systemic risk which, at present, is borne by the public. This is the risk that the failure of one payments participant to settle its net position at the end of the day on a provisional funds transfer network will lead to the subsequent failure of other participants in a domino-like fashion.