Ted Lindblom

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.

Evaluating the performance of Swedish savings banks according to service efficiency

Abstract This article develops principles for an evaluation of the efficiency of a savings bank. It starts out from the observation that such a bank is less profit oriented than a commercial bank. The customer is a vital stakeholder to the savings bank implying a greater emphasis on customer service provision. We are using data envelopment analysis (DEA) as a method to consider the service orientation of savings banks. We thereby demonstrate how an evaluation of the performance of savings banks according to “service efficiency” differs from an evaluation based on the traditional “profit” or shareholder concept. We determine the number of Swedish savings banks being “service efficient” as well as the average degree of service efficiency in this industry.

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

Pricing of Payment Services: A Comparative Analysis of Paper-based Banking and Electronic Banking

This paper aims at comparing paper-based banking and electronic banking in terms of cost-efficiency and pricing. The focus is primarily on giro payments made manually by mail and electronically via the Internet, but also by cash over the counter. The paper presents principles of efficient pricing in terms of production fees and capacity fees. It also demonstrates that the current pricing of payment services in Norway and Sweden is far away from these principles as production fees are set below marginal costs while capacity fees are in many cases above capacity costs. Such deviations may stimulate customers to an excess demand for electronic payments while paper-based payments will be depressed.

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.

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).

Bank Capital and Loan Pricing: Implications of Basle II

For a long period of time, the regulation of banking activities was top-down and highly centralized. Major decisions were in principle determined independently by regulators, with little involvement by bank management. After deregulation, which occurred in the 1980s in most European countries, regulations were relaxed and even abolished in many areas. The overall aim was to open up for decentralized decision-making in a competitive environment. Conservative regulation should be replaced with good management and sound risk appetite in banks by creating a competitive arena, directed towards both customers as well as investors. However, not all bank regulations were removed. On the contrary, at the end of the 1980s the first Basle Capital Accord, Basle I, was launched by the Bank for International Settlement (BIS).

Basel III, Liquidity Risk and Regulatory Arbitrage

This chapter discusses and analyses the incentives for banks to behave opportunistically in order to bypass liquidity constraints and even benefit from regulatory arbitrage. The chapter specifically focuses on the new liquidity constraints introduced by Basel III and provides a number of examples from both on- and off-balance sheet perspectives of how banks are transferring risk to other parts of the economy that might be less well equipped to handle these risks. The chapter concludes by discussing the potential implications of such behaviours for the role banks will play in a liquidity-constrained economy.

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.