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Safe Payments

Author

Listed:
  • Jonathan Chiu
  • Mohammad Davoodalhosseini
  • Janet Hua Jiang
  • Yu Zhu

Abstract

We use a simple model to study whether private payment systems based on bank deposits can provide the optimal level of safety. In the model, bank deposits backed by projects are subject to default risk that can be mitigated by a depositor's ex ante and ex post monitoring. Safe payment instruments issued by a narrow bank can also be used as a back-up payment system when the risky bank fails. Private adoption of safe payment instruments is generally not socially optimal when buyers do not fully internalize the externalities of their adoption decision on sellers, or when the provision of deposit insurance distorts their adoption incentives. Using this framework, we discuss the optimal subsidy policy conditional on the level of deposit insurance.

Suggested Citation

  • Jonathan Chiu & Mohammad Davoodalhosseini & Janet Hua Jiang & Yu Zhu, 2020. "Safe Payments," Staff Working Papers 20-53, Bank of Canada.
  • Handle: RePEc:bca:bocawp:20-53
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    References listed on IDEAS

    as
    1. David Andolfatto, 2021. "Assessing the Impact of Central Bank Digital Currency on Private Banks," The Economic Journal, Royal Economic Society, vol. 131(634), pages 525-540.
    2. Jonathan Chiu & Mohammad Davoodalhosseini & Janet Hua Jiang & Yu Zhu, 2019. "Bank Market Power and Central Bank Digital Currency: Theory and Quantitative Assessment," Staff Working Papers 19-20, Bank of Canada.
    3. Seyed Mohammadreza Davoodalhosseini & Francisco Rivadeneyra, 2020. "A Policy Framework for E-Money," Canadian Public Policy, University of Toronto Press, vol. 46(1), pages 94-106, March.
    4. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
    5. Barrdear, John & Kumhof, Michael, 2016. "The macroeconomics of central bank issued digital currencies," Bank of England working papers 605, Bank of England.
    6. Jesus Fernandez-Villaverde & Daniel Sanches & Linda Schilling & Harald Uhlig, 2021. "Central Bank Digital Currency: Central Banking For All?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 41, pages 225-242, July.
    7. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, February.
    8. Ioannidou, Vasso P. & Penas, María Fabiana, 2010. "Deposit insurance and bank risk-taking: Evidence from internal loan ratings," Journal of Financial Intermediation, Elsevier, vol. 19(1), pages 95-115, January.
    9. Brunnermeier, Markus K. & Niepelt, Dirk, 2019. "On the equivalence of private and public money," Journal of Monetary Economics, Elsevier, vol. 106(C), pages 27-41.
    10. Schilling, Linda & Fernandez-Villaverde, Jesus & Uhlig, Harald, 2020. "Central Bank Digital Currency: When price and bank stability collide," MPRA Paper 113248, University Library of Munich, Germany, revised 01 May 2022.
    11. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    12. Charles M. Kahn & Francisco Rivadeneyra & Tsz-Nga Wong, 2018. "Should the Central Bank Issue E-money?," Staff Working Papers 18-58, Bank of Canada.
    13. Mohammad Davoodalhosseini & Francisco Rivadeneyra, 2018. "A Policy Framework for E-Money: A Report on Bank of Canada Research," Discussion Papers 18-5, Bank of Canada.
    14. Ben Fung & Hanna Halaburda, 2016. "Central Bank Digital Currencies: A Framework for Assessing Why and How," Discussion Papers 16-22, Bank of Canada.
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    More about this item

    Keywords

    Central bank research; Digital currencies and fintech; Financial institutions; Payment clearing and settlement systems;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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