Statements to Congress

Federal Reserve Bulletin, November 1997 | Go to article overview

Statements to Congress


Statement by Alice M. Rivlin, Vice Chair, Board of Governors of the Federal Reserve System, before the Subcommittee on Domestic and International Monetary Policy of the Committee on Banking and Financial Services, US. House of Representatives, September 16, 1997

I welcome this opportunity to discuss the payments system and the Federal Reserve's role in it. A convenient, safe, reliable means of making payments is extremely important to all of us in our daily economic lives, but most of us do not think about it very often. We pay our bills by cash, check, credit card, or debit card; we have our pay deposited directly in our bank accounts and transfer funds by computer or telephone. We assume the money will get where it is supposed to go quickly and without complications. We do not spend time thinking about how that happens.

Similarly, ensuring the efficiency, reliability, and integrity of the nation's payments system is a big part of the responsibility the Congress has given to the Federal Reserve, but neither the Congress nor the public usually devotes attention to the Federal Reserve's role in the payments system. The Federal Reserve's monetary policy role tends to dominate the headlines and the hearings.

As this subcommittee is acutely aware, enormous changes are occurring in the U.S. financial services industry. Breathtaking developments are taking place in computing and communications technology. Consolidation and interstate banking are changing the structure of the banking industry, and lines are blurring between banking and other types of financial services. Because these changes could profoundly affect payments mechanisms in the future, it is a timely moment to reexamine the part the Federal Reserve plays in payments and whether that role ought to be altered. With this in mind, last fall, Chairman Greenspan asked me to chair the Committee on the Federal Reserve in the Payments Mechanism. Besides myself, the committee members are Governor Edward W. Kelley and Federal Reserve Bank Presidents William McDonough of New York and Thomas Melzer of St. Louis. Our mandate is to examine how the payments system is evolving and what part the Federal Reserve might play in the future. The process is ongoing, but I welcome the opportunity to share with you some of what we have learned and some preliminary conclusions.

My testimony is in two parts. The first presents some background on the payments system and the evolution of the Federal Reserve's role in it (a more detailed description of noncash payment instruments and their processing is given in Appendix 1).(1) The second part of the testimony discusses the work of our committee, especially the scenarios we developed and the reactions we received from participants in a series of forums on the payments system.

In addition, Appendix 2 provides a description of a small part of the Federal Reserve's check processing operation, the Interdistrict Transportation Service, in which some members have expressed interest, as well as our views on H.R.2119.

PART I: THE FEDERAL RESERVE IS ROLE IN AN EVOLVING PAYMENTS SYSTEM

A large and vibrant economy requires a staggering number of payments. In the United States, hundreds of millions of payments with a combined value of about $1.7 trillion are made every day. Although a majority of transactions are made in currency or coin, cash actually accounts for only a tiny fraction--less than 1 percent--of the value of payments.

Noncash payments can be roughly divided into two categories: (1) wholesale or large dollar transactions made primarily by banks, businesses, and governments and (2) retail or smaller dollar payments made by individuals, businesses, and other participants in the economy.

Wholesale payments, which have been growing rapidly in recent years, move over two systems: the Fedwire electronic funds transfer system operated by the Federal Reserve and the Clearing House Interbank Payments System (CHIPS) operated by the New York Clearing House. …

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