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President's Message: Should the Fed Be Involved in Providing Financial Services?

By

Thomas C. Melzer

As chairman of a new committee that sets strategic direction for the Federal Reserve's financial services, I've become more aware lately of the dramatically changing landscape of payments services in this country. At the same time, I'm struck by how much we take our smooth-running payments system for granted.

Ensuring that payments are transferred efficiently, reliably and safely is one of the Fed's primary concerns. And it's a responsibility we work very hard at, because of its impact on the nation's economic performance. Although our involvement in financial services is controversial to some, I believe the Federal Reserve contributes significantly to the health of the system. We do this by:

Stabilizing the payments system in an emergency—Today, because of the huge volume of large-dollar transactions and interdependencies among the world's financial institutions, the Fed's role is crucial. When a large bank fails, the Fed can step in to prevent the unsettled obligations of that bank from causing the collapse of other solvent banks. This involves not only the clout to make large loans, but also the expertise to manage a payments crisis. The Fed has this expertise by virtue of its direct participation in financial services.

Fostering efficiency and innovation—Because one of our main concerns is to improve the payments system, we are at times willing to invest in new technology earlier than the private sector, which must await proof of its viability. The magnetic coding on checks, which revolutionized check processing some years ago, is a perfect example of such an innovation. Today, we're focusing on how to move more payments electronically, to reduce the enormous costs of processing paper checks.

Ensuring equal access—The Fed provides its services to all depository institutions. Thus, citizens and corporations in remote locations can benefit from the same banking services that are available in more populated areas, and community banks are not at a competitive disadvantage.

Our critics argue that the Fed can't provide financial services as efficiently as the private sector. Whether the marketplace can adequately foster widespread efficiencies and preserve the integrity of the system without the Fed can, no doubt, be debated into the next century. In any case, the Fed's role in financial services will have to evolve as the payments landscape changes.

With more than 80 percent of our nation's payments, however, still being made by the relatively inefficient method of writing checks—far more than in any other developed country—I think the Fed has an important part to play. If we are to take our safe and reliable payments system for granted in the future, the Fed belongs in the thick of it.

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