Non-Par Banking: Competition and Monopoly in Markets for Payments Services

Much of the literature treats the existence of non-par banking as a legal matter, emphasizing the Board of Governors’ legal struggle to force non-par banks to pay Reserve banks at par. This treatment is not satisfactory. In competitive markets, par paying banks should have been able to undercut non par banks’ prices, once the Reserve banks had eliminated exchange charges by integrating their balance sheets. More likely, the survival of non-par banking reflected the absence of competition in the markets in which non-par banks operated. Past empirical evidence is consistent with this conclusion: non-par banks typically were monopolists in isolated rural markets for banking services.