Research Discussion Papers, Bank of Finland
No 6/2000:
Payments Remain Fundamental for Banks and Central Banks
Ralf Pauli
Abstract: Is commercial banking in the traditional sense obsolete?
Are we in fact witnessing the emergence of a fundamentally new era of
finance and payments intermediation? These questions are raised in this
paper. Instead of a formal analysis, an attempt is made here to approach
these questions from a historical perspective and a practitioner's
standpoint. Which factors have in the course of time shaped the role of
commercial banks and are present trends in the market eroding the
foundation of traditional commercial bank functions to the extent that we
are actually entering upon something that is new in a fundamental way.
Of course, we will not get definitive answers. The conclusion arrived at in
the paper is that banks will remain important intermediators of financing
and payments, and that these functions will constitute the core of banking
also in the foreseeable future. This however does not exclude structural
changes in the banking sector as a whole and in the activities of
individual banks. On the contrary, these are essential to the survival of
banks.
The paper analyses prospects for new media of exchange replacing
deposit money. It is concluded that, as regards asset transfers in the
capital market becoming a dominant medium of exchange (in the spirit of the
New Monetary Economics), there are serious impediments.
Payment flows
have increased sharply at the same time as the whole banking sector has
been making the adjustment to a more competitive situation. This has
accentuated the role of the central bank as a payments service provider to
the banks and particularly as an overseer of payment systems. The central
bank's role as payment systems overseer is likely to receive even greater
emphasis in the future. The central bank's oversight mandate requires
further specification as regards the payment systems to be overseen and how
oversight relates to banking supervision.
Our analysis demonstrates
also that current trends in the market are not weakening but rather are
strengthening the traditional interrelationship between banks and the
central bank in the field of payments. The roles of the banks and the
central bank still need fine tuning. It is concluded that payment systems
can best serve the rest of the economy if the prime responsibility to
develop the systems is left to the private sector, while the central bank
has a recognized position as a public policy entity that will do what is
necessary to achieve a sufficient level of safety and efficiency.
Keywords: payments; oversight; medium of exchange; bank; central bank; (follow links to similar papers)
40 pages, June 26, 2000
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