Payment System Externalities

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...

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Veröffentlicht in:The Journal of finance (New York) 2022-04, Vol.77 (2), p.1019-1053
Hauptverfasser: PARLOUR, CHRISTINE A., RAJAN, UDAY, WALDEN, JOHAN
Format: Artikel
Sprache:eng
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Zusammenfassung: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.
ISSN:0022-1082
1540-6261
DOI:10.1111/jofi.13110