Risks in payment and settlement systems and the rationale for their regulation

This chapter outlines and analyses risks and market failures that have led to the close regulation, supervision, and oversight of payment and settlement systems. Drawing on concepts in economics, it articulates the underlying rationale for their regulation. The chapter suggests that while payment and settlement systems share similar characteristics with other networks, such as network externalities, negative externalities, and the provision of essential services, they are nevertheless unique and require tailored regulatory intervention. The chapter, accordingly, presents the objectives of regulating payment and settlement systems and their potential trade-offs and suggests mechanisms to alleviate coordination failures.