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Payment intermediation and the origins of banking

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James McAndrews
William Roberds

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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.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 85.

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Date of creation: 1999
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Handle: RePEc:fip:fednsr:85

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Keywords: Payment systems ; Trade ; Bank loans ; Economic history;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Baer, Herbert L. & France, Virginia G. & Moser, James T., 1994. "Opportunity cost and prudentiality : an analysis of futures clearinghouse behavior," Policy Research Working Paper Series 1340, The World Bank. [Downloadable!]
  3. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February. [Downloadable!] (restricted)
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  4. Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 4(4), pages 335-344, December. [Downloadable!] (restricted)
  5. repec:cup:macdyn:v:1:y:1997:i:4:p:770-79 is not listed on IDEAS
  6. Freeman, Scott, 1996. "Clearinghouse banks and banknote over-issue," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 101-115, August. [Downloadable!] (restricted)
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  7. Rajan, Raghuram G, 1998. "The Past and Future of Commercial Banking Viewed through an Incomplete Contract Lens," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 524-50, August.
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  8. Douglas W. Diamond & Raghuram G. Rajan, 1999. "A Theory of Bank Capital," NBER Working Papers 7431, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Williamson, Stephen D., 1992. "Laissez-faire banking and circulating media of exchange," Journal of Financial Intermediation, Elsevier, vol. 2(2), pages 134-167, June. [Downloadable!] (restricted)
  10. Cooley Thomas F. & Smith Bruce D., 1995. "Indivisible Assets, Equilibrium, and the Value of Intermediation," Journal of Financial Intermediation, Elsevier, vol. 4(1), pages 48-76, January. [Downloadable!] (restricted)
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  12. Gorton, Gary & Pennacchi, George, 1990. " Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March. [Downloadable!] (restricted)
  13. Nobuhiro Kiyotaki & John Moore, 2004. "Credit Chains," ESE Discussion Papers 118, Edinburgh School of Economics, University of Edinburgh.
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  18. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June. [Downloadable!] (restricted)
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  19. Flannery, Mark J, 1994. "Debt Maturity and the Deadweight Cost of Leverage: Optimally Financing Banking Firms," American Economic Review, American Economic Association, vol. 84(1), pages 320-31, March. [Downloadable!] (restricted)
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  20. Bryant, John, 1997. "Coordination, Credit, And An Elastic Currency," Macroeconomic Dynamics, Cambridge University Press, vol. 1(04), pages 770-779, December. [Downloadable!]
  21. Donald P. Morgan & Katherine A. Samolyk, 1998. "Piggy banks: financial intermediaries as a commitment to save," Staff Reports 50, Federal Reserve Bank of New York. [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Charles M. Kahn & James McAndrews & William Roberds, 1999. "Settlement risk under gross and net settlement," Working Paper 99-10, Federal Reserve Bank of Atlanta. [Downloadable!]
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  2. David R. Skeie, 2008. "Banking with nominal deposits and inside money," Staff Reports 242, Federal Reserve Bank of New York. [Downloadable!]
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  3. Goetz von Peter, 2004. "Asset Prices and Banking Distress: A Macroeconomic Approach," Finance 0411034, EconWPA. [Downloadable!]
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  4. KOBAYASHI Keiichiro, 2009. "A Monetary Model of Banking Crises," Discussion papers 09036, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
  5. 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, issue May. [Downloadable!]
  6. Biaggio Bossone & Abdourahmane Sarr, 2002. "A New Financial System for Poverty Reduction and Growth," IMF Working Papers 02/178, International Monetary Fund. [Downloadable!]
  7. 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. [Downloadable!]
  8. 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. [Downloadable!]
  9. Edgardo Barandiarán, 2000. "Chile Después del Peso: Viviendo con el Dólar," Cuadernos de Economía (Latin American Journal of Economics), Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 37(110), pages 241-267. [Downloadable!]
  10. Kari Kemppainen, 2004. "Competition and regulation in European retail payment systems," Microeconomics 0404008, EconWPA. [Downloadable!]
  11. 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. [Downloadable!]
  12. Goetz von Peter, 2003. "A Unified Approach to Credit Crunches, Financial Instability, and Banking Crises," Macroeconomics 0312006, EconWPA. [Downloadable!]
  13. James 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. [Downloadable!]
  14. Edward S. Prescott & John A. Weinberg, 2000. "Incentives, communication, and payment instruments," Working Paper 00-11, Federal Reserve Bank of Richmond. [Downloadable!]
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This page was last updated on 2009-11-18.

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