Bank Money Creation and the Payments System

By Biagio Bossone

PKES Working Paper 2117

November 2021

This article investigates how the role that banks play in the payment system space affects their money creation power and process. In particular, the article analyzes how the payments market share of each bank affects its money creation power and how payment settlement technologies and rules determine the banks’ demand for funding and, hence, their money creation power. Also, as the power to create money enables money creators to extract extra-profits or rents ("seigniorage") from the economy, the article evaluates analytically how banks extract seigniorage through money creation and how bank seigniorage differs from profits from pure financial intermediation. By showing the central role that payment systems play in the context of such an important economics topic as money creation, the article seeks to emphasize the relevance of payment system analysis for macroeconomic theory and practice and points to the need for achieving better integration of the two disciplines.

Keywords: Bank; Bank money creation; Central bank policy; Demand deposits; Financial intermediaries; Funding; Lending; Payment and settlement systems

JEL classification: E51 E58 G21