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Payment intermediation and the origins of banking

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  • James J. McAndrews
  • William Roberds

Abstract

The medieval banks of continental Europe facilitated trade by serving as payment intermediaries. Depositors commonly would pay one another by transferring bank balances with the aid of overdraft credit. We model this process in an environment of intermediate good exchange with incomplete contract enforcement. Our model suggests that the early banks were capable of accessing the ?netting credit? that exists by virtue of there being a high proportion of offsetting transactions in an economy. Individual traders are unable to net their individual positions because of difficulty in enforcing contracts for future performance with the other traders. Banks, by standing between buyer and seller on a centralized basis, can internalize the offsetting nature of the whole set of trades. This original role of banks is still a vital one.

Suggested Citation

  • James J. McAndrews & William Roberds, 1999. "Payment intermediation and the origins of banking," Staff Reports 85, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:85
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    Cited by:

    1. von Peter, Goetz, 2009. "Asset prices and banking distress: A macroeconomic approach," Journal of Financial Stability, Elsevier, vol. 5(3), pages 298-319, September.
    2. Gaetano Antinolfi & Francesca Carapella & Charles Kahn & Antoine Martin & David Mills & Ed Nosal, 2015. "Repos, Fire Sales, and Bankruptcy Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(1), pages 21-31, January.
    3. Cyril Monnet & Thomas Nellen, 2021. "The Collateral Costs of Clearing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(5), pages 939-970, August.
    4. John Bryant, 2005. "Coordination, Fragility, High-Powered Money, and the Liquidity Trap: A "Tobinesque" Parable," Eastern Economic Journal, Eastern Economic Association, vol. 31(1), pages 97-106, Winter.
    5. Simpson Prescott, Edward & Weinberg, John A., 2003. "Incentives, communication, and payment instruments," Journal of Monetary Economics, Elsevier, vol. 50(2), pages 433-454, March.
    6. Gorton, Gary & Winton, Andrew, 2003. "Financial intermediation," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 8, pages 431-552, Elsevier.
    7. Kahn, Charles M & McAndrews, James & Roberds, William, 2003. "Settlement Risk under Gross and Net Settlement," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 591-608, August.
    8. Dwyer Jr., Gerald P. & Samartín, Margarita, 2009. "Why do banks promise to pay par on demand?," Journal of Financial Stability, Elsevier, vol. 5(2), pages 147-169, June.
    9. Edgardo Barandiarán, 2000. "Chile Después del Peso: Viviendo con el Dólar," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 37(110), pages 241-267.
    10. John A. Weinberg, 1999. "Interconnection and Rivalry between Banks," Center for Financial Institutions Working Papers 00-15, Wharton School Center for Financial Institutions, University of Pennsylvania.
    11. James J. McAndrews & Samira Rajan, 2000. "The timing and funding of Fedwire funds transfers," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 17-32.
    12. repec:zbw:bofrdp:2003_016 is not listed on IDEAS
    13. Kenneth N. Kuttner & James J. McAndrews, 2001. "Personal on-line payments," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 35-50.
    14. Kari Kemppainen, 2004. "Competition and regulation in European retail payment systems," Microeconomics 0404008, University Library of Munich, Germany.
    15. Kemppainen, Kari, 2003. "Competition and regulation in European retail payment systems," Research Discussion Papers 16/2003, Bank of Finland.
    16. Mr. Biaggio Bossone & Mr. Abdourahmane Sarr, 2002. "A New Financial System for Poverty Reduction and Growth," IMF Working Papers 2002/178, International Monetary Fund.
    17. KOBAYASHI Keiichiro, 2009. "A Monetary Model of Banking Crises," Discussion papers 09036, Research Institute of Economy, Trade and Industry (RIETI).
    18. Skeie, David R., 2008. "Banking with nominal deposits and inside money," Journal of Financial Intermediation, Elsevier, vol. 17(4), pages 562-584, October.
    19. Kemppainen, Kari, 2003. "Competition and regulation in European retail payment systems," Bank of Finland Research Discussion Papers 16/2003, Bank of Finland.
    20. Marc BOURREAU & Marianne VERDIER, 2010. "Cooperation for Innovation in Payment Systems: The Case of Mobile Payments," Communications & Strategies, IDATE, Com&Strat dept., vol. 1(79), pages 95-114, 3rd quart.
    21. Goetz von Peter, 2003. "A Unified Approach to Credit Crunches, Financial Instability, and Banking Crises," Macroeconomics 0312006, University Library of Munich, Germany.
    22. Stephen G. Cecchetti, 1999. "The future of financial intermediation and regulation: an overview," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 5(May).
    23. Bossone, Biagio, 2001. "Do banks have a future?: A study on banking and finance as we move into the third millennium," Journal of Banking & Finance, Elsevier, vol. 25(12), pages 2239-2276, December.
    24. Thomas C. Glaessner & Tom Kellermann & Valerie McNevin, 2004. "Electronic Safety and Soundness : Securing Finance in a New Age," World Bank Publications - Books, The World Bank Group, number 15029, December.
    25. Goetz von Peter, 2004. "Asset Prices and Banking Distress: A Macroeconomic Approach," Finance 0411034, University Library of Munich, Germany.

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    Keywords

    Payment systems; Trade; Bank loans; Economic history;
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