Payment System Externalities

40 Pages Posted: 3 Jan 2017 Last revised: 29 Apr 2021

See all articles by Christine A. Parlour

Christine A. Parlour

University of California, Berkeley - Finance Group

Uday Rajan

Stephen M. Ross School of Business, University of Michigan

Johan Walden

University of California, Berkeley - Finance Group

Date Written: April 28, 2021

Abstract

We examine how the payment processing role of banks affects their lending activity. In our model, banks operate in separate zones, and issue claims to entrepreneurs who purchase some inputs outside their own zone. Settling bank claims across zones incurs a cost. In equilibrium, a liquidity externality arises when zones are sufficiently different in their outsourcing propensities---a bank may restrict its own lending because it needs to hold liquidity against claims issued by another bank. Our work highlights that the disparate motives for interbank borrowing (investing in productive projects and managing liquidity) can have different effects on efficiency.

Keywords: Payment Systems, Banks, Central Bank Digital Currency

JEL Classification: G21, E51

Suggested Citation

Parlour, Christine A. and Rajan, Uday and Walden, Johan, Payment System Externalities (April 28, 2021). Journal of Finance, Forthcoming, Ross School of Business Paper No. 1337, Available at SSRN: https://ssrn.com/abstract=2892150 or http://dx.doi.org/10.2139/ssrn.2892150

Christine A. Parlour (Contact Author)

University of California, Berkeley - Finance Group ( email )

Haas School of Business
545 Student Services Building
Berkeley, CA 94720
United States
510-643-9391 (Phone)

Uday Rajan

Stephen M. Ross School of Business, University of Michigan ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
734-764-2310 (Phone)

HOME PAGE: http://webuser.bus.umich.edu/urajan

Johan Walden

University of California, Berkeley - Finance Group ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
(510) 643-0547 (Phone)

HOME PAGE: http://www.haas.berkeley.edu/faculty/walden.html

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