decentralized and diverse nature of banks in the united states is a feature that goes back to the 1800s and has the merits of promoting competition and a vibrant economy. however, when engaging in clearing and settling payments, coordination problems and information asymmetries across banks can be, and were, destabilizing. while the private sector made advances in resolving those issues, the panic of 1907 showed that those steps were not sufficient. as successful as the nych was for its members, it could not protect its members and the economy from risks in the growing share of finance occurring outside its walls. this contributed to the motivation to establish the federal reserve and its role in payments. fast forward to today, and we are once again in an era of rapid change and innovation in money and payments. some of this will not pan out. some of this change is about delivering services already available but doing so with new technologies. and some of it is leveraging new technology to rethink existing payment, clearing, and settlement structures. how will all of this come together? and what will be the respective roles of the private sector and the federal reserve? let's break it down, keeping in mind my principle that the federal reserve should focus on addressing issues that the private sector cannot address alone and, in doing so, promote an efficient and resilient u. s. payment system. i'll start by discussing the important roles that the private sector now plays in the payment system and in the evolution of payments under way. the private sector connects consumers and businesses to the payment system, with financial institutions competing to provide services to their customers. such competition can lead to better products and services for consumers as profit - seeking competitors look for opportunities to win over customers including through the adoption of new technologies. i have noted my concern that some see these new technologies as an opportunity for the public sector to play a bigger role in payments, which may crowd out private investment. i believe this would be a policy mistake and a better approach is one in which the private sector continues to have a significant footprint, with the role of government limited. one important reason for that is that the private sector, through competition, is typically best situated to sort out good ideas from bad ideas, rather than central banks or other public - sector institutions choosing winners and losers. at the early stages of innovation, the true value - added of the application of new technologies is murky. market competition helps sort that out and typically leads to

##houses to address problems in other parts of the system increases further the need to ensure the safety of clearinghouses themselves. as mark twain ’ s character pudd ’ nhead wilson once opined, if you put all your eggs in one basket, you better watch that basket. the theme of expanded use of clearinghouses as a tool to address other problems in the system is perhaps best illustrated by the derivatives provisions of the dodd - frank act. prior to the crisis, some of the same economic forces that had led to the development of clearinghouses for other instruments were already pushing industry participants toward greater use of clearinghouses for otc derivatives transactions. for example, as one response to the growth of the market for interest rate swaps in the early 1990s, a clearinghouse was created in london in 1999 that, by the onset of the financial crisis, was handling a major portion of interdealer activity in those swaps. 14 also, in the years leading up to the crisis, the federal reserve bank of new york initiated joint efforts with other regulators and market participants to improve clearing arrangements for credit default swaps. however, for several reasons, the willingness of market participants to move all derivatives transactions to clearinghouses was limited. notably, many believed that the standardization of derivatives contracts that is needed for multilateral clearing imposed too high a cost on end users with needs for customized arrangements. market participants also were concerned that the establishment of clearinghouse guarantees might require implicit subsidies from clearinghouse members with stronger credit to those with weaker credit. these calculations, however, were substantially changed by the galvanizing events of 2008, notably the development of large and uncertain counterparty credit risks in many bilateral derivatives agreements. on the heels of the crisis, the group of twenty countries endorsed a policy of mandatory central clearing for standardized otc derivatives. the aim was to reduce systemic risk in the financial system more broadly as well as to improve the transparency of the otc derivatives markets. in the united states, title 7 of the dodd - frank act incorporated a mandatory clearing policy for standardized derivatives. other major countries are following suit. in the spirit of keeping a close eye on the basket, as dependence see committee on payment and settlement systems and the euro - currency standing committee of the central banks of the group of ten countries ( 1998 ), otc derivatives : settlement procedures and counterparty risk management ( basel, switzerland : bank for international settlements, september ) http : / / www. bis. org / publ / cpss27