Abstract
This paper assesses the impact of introducing an efficient payment system on the amount of credit provided by the banking system. Two channels are investigated. First, innovations in wholesale payments technology enhance the security and speed of deposits as a payment medium for customers and therefore affect the split between holdings of cash and the holdings of deposits that can be intermediated by the banking system. Second, innovations in wholesale payments technology help establish well-functioning interbank markets for end-of-day funds, which reduces the need for banks to hold excess reserves. The authors examine these links empirically using payment system reforms in Eastern European countries as a laboratory. The analysis finds evidence that reforms led to a shift away from cash in favor of demand deposits and that this in turn enabled a prolonged credit expansion in the sample countries. By contrast, while payment system innovations also led to a reduction in excess reserves in some countries, this effect was not causal for the credit boom observed in these countries.
Highlights
Payment systems[1] are the means by which inside money is transferred between banks.[2]
An economy which increases its reliance on inside money relative to outside money may be able to support a higher level of capital and increased growth as that capital is accumulated
Our results suggest that for the countries in our sample, the adoption of automated interbank payment systems was an important precondition for the credit boom documented by Cottarelli et al (2003), among others, and that the e¤ect of payments reform on credit creation has worked through a "deposit channel", rather than a "reserves channel"
Summary
Payment systems[1] are the means by which inside money is transferred between banks.[2]. Our results suggest that for the countries in our sample, the adoption of automated interbank payment systems was an important precondition for the credit boom documented by Cottarelli et al (2003), among others, and that the e¤ect of payments reform on credit creation has worked through a "deposit channel", rather than a "reserves channel". These ...ndings serve to illustrate a simple but fundamental point: the banking system’s function as provider of credit to the economy builds on its capacity to o¤er a reliable payment medium.
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