Basics of Payment Systems are managed by central banks and referred to as a "central bank payment system." In many countries, those two payment systems co-exist and share the roles. Usually, a payment system covers one jurisdic- tion (or country) and one currency. In several cases, however, a payment system covers more than one country or more than one currency. There is also a case with several payment systems interlinked with each other. Payment systems take on a public nature, as they handle a huge amount of payments from many individuals, corporations and banks all over the country. Thus some conditions are required for a payment system. First, a payment system should be managed efficiently by a sound business method. Second, the operator of payment system should manage settlement risk strictly in order to minimize the effect when defaults happen. of retail payment systems. The typical case is the Federal Reserve in the US. Some central banks also offer a settlement service for the private payment systems. More concretely, a private payment system calculates the positions to be settled among the participants, and then the actual transfers of funds take place in the central bank system. Another important role of central banks is to provide the liquidity to the participants of a payment system. The payment system requires a certain amount of intraday liquidity for a smooth settlement. As a provider of central bank money, only a central bank can carry out this responsibility (discussed in more detail later). Banks Banks are major participants of payment systems. They use payment systems to settle their own ob- ligations in the money market, securities market and FX market. They also use payment systems on behalf of their customers, e.g. individuals and corporations. Central Banks Historically, central banks have played an active role in payment system. Central banks inherently have the function as "the bank for banks," where almost all banks hold accounts. Central banks can provide the settlement assets with finality, which is called the "central bank money." Therefore, as a part of their function, central banks operate a payment system and provide settlement service for financial institutions, typically banks. Central banks are also the active participants in payment systems for conducting open market operations. It means that the central bank uses its payment system to implement monetary policy. Hence, it is widely recognized that a sound pay- ment system is a precondition for the successful conduct of monetary policy (Bech, 2008). The extent to which central bank is involved in the payment system varies from country to country. It is generally the case that central banks tend to support the interbank payment system, which handles large-value payments. Some other central banks are also involved in the operation BANKS AS A PAYMENT SYSTEM Internal Settlement As mentioned above, banks can execute "internal settlement," when the payer and the payee have their bank accounts at the same bank. This kind of transaction is referred to as an "on-us" transaction or "book transfer." In this sense, a bank can be regarded as a kind of payment system itself. That is because they can make settlements with their books, even in a small scale. The more they make internal settlements, the more they take on the nature of payment system. When it comes to the transfer of funds between accounts held at different banks, the payment system comes into play and handles the settlement between the two banks. 5