Magnus Willesson

What does it Cost to Make a Payment

We survey the limited data that exists concerning the cost of making/receiving a payment by banks, retailers, and other parties to a transaction. Since an electronic payment costs between one-third and onehalf that of a paper-based instrument, a country may save 1% of its GDP annually as it shifts from a fully paper-based to a fully electronic-based payment system. Some gains have already been realized. Additional analysis indicates that bank costs of making a payment may have fallen by 45% in Europe as the share of electronic transactions in 12 countries rose from .43 to .79 over 1987-1999.

Financial Crisis and Bank Profitability

The recent turmoil in money and capital markets around the world has clearly shown the vulnerability of highly interconnected financial systems in times of recession. This paper examines the impact of the financial crisis on the profitability and risk-taking of Swedish banks. At the beginning of the crisis many banks experienced liquidity problems due to a mismatch in their funding of loans. These banks had for a number of years been financing an increasing long-term (mortgage) lending with short-term borrowing on the market. The financial crisis radically changed the risk premiums on both money and capital markets, and banks’ refinancing on these markets became extremely expensive and more or less impossible to accomplish. Without resolute intervention by the Government, issuing general banking guarantees, and the Central Bank, fuelling the market with liquidity to ever lower interest rates, the financial system might have collapsed totally. These prompt actions moved the focus from liquidity risk to credit risk. Even though Swedish banks seem to comply well with the new Basel accord (Lindblom and Willesson, 2010), three of the four largest commercial banks issued new equity in connection with the crisis in order to strengthen their capacity to absorb anticipated credit losses, primarily on the Baltic markets, in a ‘worst case scenario’.1

Financial Crisis and EU banks' Performance

The financial crisis at the end of the past decade clearly disclosed the vulnerability of globally interconnected financial systems in times of recession. Financial problems and failures on the US financial market in autumn 2008 almost immediately contaminated financial systems and institutions worldwide. The practical meaning of theoretically defined concepts like ‘systemic risk’ and particularly ‘counterparty risk’ and ‘liquidity risk’ became very apparent and real not only for banks and other financial institutions, but also for their customers and society as a whole. Risk premiums charged on money and capital markets were immediately increased up to levels that made refinancing on these markets extremely expensive. In many countries the financial system was more or less on the verge of collapse; without the rescue actions of central banks and governments, it is highly likely that a substantially larger number of banks would have entered into bankruptcy than actually did so. Lind-blom, Olsson and Willesson (2011) report that the guarantee programme introduced into the Swedish market had already been utilized from the start by domestic banks in general, and by one of the four large commercial banks in particular. In their study they find that this programme allowed the banks to operate without major constraints during the crisis and, hence, to perform rather well in their home market.

Pricing of Card Payment Services in Scandinavian Banking

Pricing of card payment services includes many considerations of cost and revenue in an environment of changing payment technology, network effects in two-sided markets and price bundling. This paper describes the consumer pricing methods for card payment services by Scandinavian banks and evaluates their explicit pricing methods. The main findings suggest that Scandinavian banks in general are more interested in earning revenue from implicit prices than in encouraging the use of more cost efficient technology by charging explicit transaction fees. However, the pricing methods applied may vary, depending on the country and a banks service supply.

Financial systems, markets and institutional changes

Financial Systems, Markets and Institutional Changes analyses and exemplifies how the financial system endogenously adjusts to institutional changes such as new technology, political tendencies, cu ...

Banks’ Measurement of Operational Risk and the Effect on Regulatory Capital

The exposure to operational risk is nothing new for banks, but as Moosa (2007:167) stresses: ‘The trend towards greater dependence on technology, more intensive competition, and globalization have left the corporate world more exposed to operational risk than ever before’. For a bank the occurrence of an extreme or major ‘one-off’ event in its daily operations may be even more damaging than its credit losses resulting from the current collapse of the financial markets. However, the ability of the bank to properly assess and control, or hedge itself against, the negative economic consequences of such events seems to be less developed than its management of credit and market risks (Flores et al., 2006; Wold, 2006; Moosa, 2007; Bonson et al., 2008; Wahlstrom, 2009). A challenge for the bank is that the main focus of its operational risk assessment must be on the distribution tail rather than on the distribution of the most frequent losses (Wei, 2007; Moosa, 2008).

What Is and What Is not Regulatory Arbitrage? A Review and Syntheses

Regulatory arbitrage is an avoidance strategy of regulation that is exercised as a result of a regulatory inconsistency. As a regulatory response strategy, it has been in the shadow of other possible determinants of regulatory development. This chapter reviews 91 research articles and addresses the analytical foundations of regulatory arbitrage in the literature in a search for operative definitions, theories and methodological concerns. Despite the observation that many studies treat regulatory arbitrage as a phenomenon that everyone implicitly knows, the review shows that an explicit understanding of regulatory arbitrage and its motives remains scattered. Theoretically speaking, the chapter concludes that the dominant approach is that when a regulatory arbitrage opportunity exists, it is utilised. However, several theories examining the opportunity costs related to the use of regulatory arbitrage are also identified. Both methodologically and empirically, the chapter concludes that regulatory arbitrage as a strategic choice is characterised as a non-action of an event, thus delimiting the opportunities to conduct empirical research. Transaction-based regulatory arbitrage is more straightforward, and several studies therefore present measures of regulatory arbitrage. More precise and operative definitions and expanded eclectic theoretical understanding of drivers may spur stronger empirical research and regulatory development.

A Note on Regulatory Arbitrage: Bank Risk, Capital Risk, Interest Rate Risk and ALM in European Banking

Interest rate risk and its management are one of the classic activities of banking operations, classified as asset and liability management (ALM). This chapter considers ALM as a possible avenue for regulatory arbitrage under regulatory capital constraints. The theoretical purpose is to present a theory of regulatory arbitrage as a regulatory response to capital requirements in banking depending on capitalisation mechanisms. The empirical purpose is to analyse capital risk and bank risk in European banking in terms of ALM. The theoretical and empirical results presented support observations of a possible loophole in today’s capital regulations via ALM and of regulatory arbitrage as a regulatory response. In addition, it is more likely that low-capitalised banks utilise ALM as a way to counter higher levels of capital regulation.

Basel III and Banking Efficiency

The regulation of an industry is generally motivated by market imperfections and/or (the risk of) market failures that can be extremely costly for the society. This implies that there are ‘gains’ associated with such regulation. However, regulation is not costless, and it is vital that the ‘cost’ of regulation does not exceed its expected gain. The deregulation of financial markets in many countries in the eighties was driven by this matter of course. Then the objective was to increase market efficiency by removing regulatory constraints. Even though new regulations in the form of capital adequacy requirements (i.e. the Basel I and II accords) were subsequently imposed, it is important to bear this in mind when further re-regulation of the banking industry is on the agenda in the aftermath of the 2008 financial crisis. Regulation of the banking industry is a balancing act! On one hand, as for example Lind (2005) points out, there are strong reasons for the prudential regulation of banks in order to mitigate their adoption of overly risky strategies; banks’ asset transformation through credit and liquidity creating activities is intrinsically vulnerable, and when the risk exposures of banks are high even minor disturbances in this transformation process can jeopardize the overall financial stability of the system. Moreover, as banks are the major providers of payment services, the solidity and soundness of these institutions are also crucial for trade and other payment- related activities in an economy.

Does Bank Regulation Spill Over to Firm Financing? SME Financing, Bank Monitoring, and the Efficiency of the Bank Lending Channel

This chapter analyses spill over between banks and firms when required bank capital is regulated. We contribute to the existing literature by addressing different regulatory responses with an impac ...