more reasonable based on historical experience. a number of capital raisings that had sought to take advantage of the earlier very generous terms were postponed. volatility in some financial markets increased, share prices declined somewhat and a general sense of heightened uncertainty was evident. in considering the implications of all this for our decision on monetary policy, there were two questions to ask. the first was whether there was information to suggest that financial developments were likely to make a sufficient difference, over the relevant horizon for policy, to the global economy, and therefore the australian economy and the inflation outlook, to remove the macroeconomic case for a 25 basis point adjustment to cash rates. on balance, we judged that there was not. downside risks to the us economy do appear to have increased over recent months, but in other parts of the world the growth outlook has, if anything, been marked higher recently. the second question was whether a rise of 25 basis points in australian cash rates would, in itself, be financially destabilising. no credible case could be made for that idea. in fact, it would probably have been more destabilising to expectations not to have carried out a policy adjustment that most people could see was needed. accordingly, as you know, monetary policy was tightened last week, taking the cash rate to 6. 5 per cent. subsequently, towards the end of last week there was a period of stress in some major country money markets. because the exposures to the mortgage problems in the us are still coming to light, financial institutions are uncertain over the standing of other market participants. objectively, it is extremely unlikely that the sub prime mortgage exposures could significantly damage the core banking system in any significant country. the exposures are spread far too widely for that to occur. but precisely because they are spread widely, and because the associated financial structures are opaque, information on who is exposed and by how much is incomplete. hence people remain wary. at times of uncertainty, market participants naturally get more cautious and want to hang on to cash, rather than lending it in the interbank market. in such circumstances, central banks typically respond by being prepared to make additional cash available, through purchases of high quality assets from market participants, in sufficient quantities to keep the cash rate at the level required by monetary policy considerations. several major central banks made very substantial injections in this way on thursday and friday last week in the face of an abrupt shift in cash market conditions. while the likelihood of a significant

donald l kohn : evolution of retail payments and the role of the federal reserve remarks by mr donald l kohn, vice chairman of the board of governors of the us federal reserve system, at the western payments alliance 2006 payments symposium, las vegas, nevada, 11 september 2006. * * * i am pleased to have the opportunity to speak at this symposium examining the continuing convergence of paper and electronic payments. today marks the fifth anniversary of the september 11th terrorist attacks on the united states. on that day, as our nation came to grips with the terrible events it had just witnessed, the federal reserve remained open and operating, in part to help ensure that the nation ’ s payments system continued to function. in the aftermath of the attacks, the financial industry has taken many steps to strengthen the resilience of our nation ’ s critical payments infrastructures. for the retail payments system, the september 11th attacks highlighted the banking industry's extensive reliance on air transportation as planes came to a standstill and the collection of checks slowed dramatically. this prompted a heightened focus on how electronic processing technologies could be applied to the check - collection system to reduce the reliance on air transportation and improve check - processing efficiency more generally. my remarks today, which reflect my own thoughts and not necessarily those of the other members of the federal reserve board, will focus on the future of the check - collection system and the future role of the federal reserve in retail payments services. 1 a period of transition in the retail payments system today, shifts in consumer behavior and rapid industry innovation, along with legal and regulatory change, are dramatically reshaping our retail payments system. because of the increasing availability and declining cost of convenient electronic payment alternatives, many payments that were until recently being made in paper form are today being made electronically. in addition, new electronic technologies are now being harnessed to improve the processing of checks. the 2003 federal reserve study on the use of retail payment instruments revealed dramatic changes in consumer behavior. it found that, for the first time ever, the number of electronic payments in the united states - such as credit card, debit card, and automated clearinghouse ( ach ) payments exceeded check payments. a range of data indicates that electronic payments have continued to increase and that check payments have continued to decline. debit cards, primarily used by consumers for everyday purchases, are the fastest growing segment of the retail payments system. consumers seem to view debit cards as a natural progression from cash and checks because they are a convenient