Does Network Economics Allow to Enlighten Banking Organization?

Abstract

Free banking theory aims at showing that competition is the most efficient system as far as compensation between banking institutions is concerned. Private moneys could then exist simultaneously. Such a point of view seems to be at variance with a general tendency consisting in concentrating payment systems under the authority of a Central Bank. It also contrasts with the creation and development of centralized electronic payment systems resting upon new communication means in order to prevent systemic risk. Four main aspects are thus developed to understand the way monetary systems are organized. The first one consists in examining in what extent central money has to be considered as a specific good, whose existence rests upon the security of transfer mechanisms in which irrevocability appears to be an important element. We demonstrate how the technical organization of inter-bank payment system may limit the potentially disruptive contagion effect of an individual failure leading to collapse of other banks when nothing is done to prevent it. The second section gives a presentation of compensation mechanism resting upon network economics. From the typology established by Katz and Shapiro (1985) we demonstrate that talking about externalities is pertinent whenever a quite small number of agents are involved in the same payment system. We then wonder if one compensation system is preferable or not to several ones. The third section presents a model resting upon the so-called club-goods, i.e. intermediate goods that are neither public goods, nor private goods. We then focus on the club's or network's size owing to the idea according to the utility that an agent receives from its consumption depends on the number of other persons with whom he must share its benefits. We show that pure competition is not an optimal solution but that monopoly can be sub-optimal too for reasons dealing with congestion more than with cost. In the last and conclusive section we present normative considerations concerning compensation systems and the way to regulate them using technical means. We thus demonstrate the need for monetary authorities to have at their disposal several means of action in order to grant the security and durability of the payment systems.

JEL Classification: G21, G28