The Texas banking crisis and the payments system

The Federal Reserve System plays a crucial role in the payments system that is especially important during periods of financial turmoil. In this article, Robert Clair, Joanna Kolson, and Kenneth Robinson explain the process and the risks involved in clearing checks in the private sector. They compare these processes and risks with the essentially risk-free check-clearing service the Federal Reserve System offers. During banking crises, they hypothesize, banks will increase their check-clearing through the Federal Reserve to minimize their risk exposure. A model of Federal Reserve check-clearing volume is constructed and estimated. The empirical results show that during banking crises, Federal Reserve check- processing volume rises as banks seek safer methods of clearing checks. Consequently, Federal Reserve payment services are important tools in minimizing the disruptive effects of banking crises on the economy.Banks and banking - Texas ; Payment systems