The Swedish Financial Revolution
They cannot easily gain access to electronic means for some goods and transactions, and rely on banks and their customer service. If cash disappears, commercial banks would wield greater control. Urban consumers worldwide are increasingly paying with apps and plastic. In China and in other Asian countries rife with young smartphone users, mobile payments are routine. In Europe, about one in five people say they rarely carry money. In Belgium, Denmark and Norway, debit and credit card use has hit record highs. We need to pause and think about whether this is good or bad, and not just sit back and let it happen.
But Sweden — and particularly its young people — is at the vanguard. Bills and coins represent just 1 per cent of the economy, compared with 10 per cent in Europe and 8 per cent in the United States. About one in 10 consumers paid for something in cash this year, down from 40 per cent in Most merchants in Sweden still accept notes and coins, but their ranks are thinning. Ikea, whose flat-box furniture is a staple of young households, has been experimenting to gauge the allure and effect of cashless commerce.
Patric Burstein, a senior manager, said the cashless test had freed employees to work on the sales floor. So far, around 1. Rather than bother with bills, Ikea has been offering those customers freebies.
The test so far suggests that cash is not essential and, instead, may be costly, he said. The below map shows countries that index highly in terms of Open Banking readiness, with some surprising inclusions.
(PDF) Banks and Swedish financial crises in the s and s | Anders Ögren - carponealira.ml
The potential for Open Banking is to create an ecosystem of innovation that sits in between the traditional custodians of our financial data and the consumer - using data aggregation to deliver real value and shift the axis of control back to the consumer. During , discussions around financial services will increasingly turn towards Open Banking as a cornerstone of the next financial services revolution.
Far from being disruptive, Open Banking is driving increased collaboration between traditional banks and Fintech companies. In fact, the big banks are facing the inevitable change putting their best foot forward and the API race is on. Whilst Open Banking may still be a horizon event in several countries, individual banks are taking the lead in releasing API capabilities across their markets.
Split connects businesses and consumers with banking infrastructures via Direct Debit and Consent Management solutions and overlays. Find out mote www. All Collections. Finally, we know that correlations based on historical data move around enormously, in part because as Green and Wachter rightly stress household behaviour can in fact change significantly over time.
Taken all together, there are formidable technical obstacles to getting "mark to model" evaluations right, particularly for complex products. Finally, two other downsides affecting financial institutions suggest themselves.
The first is enhanced reputational risk. When loans to households turn bad, and foreclosures rise, the political process is such that someone will inevitably be blamed, and not only the guilty.
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This could affect originators and other lenders, as well as those responsible for the securitisation process. Even the reputation of rating agencies might be affected, in spite of their assertions that investors were remiss in not using ratings in the way that the rating agencies intended.
An important issue would be the effect of such a loss of reputation on the continued capacity of the institution to function effectively. Implications for the financial system more broadly. The more effective transfer of risk, away from originators and packagers to other financial institutions with longer-term liabilities and to households themselves, is generally thought to have made the financial system more stable.
Similarly, with exposure to households now complementing the more traditional exposure to the business sector, there is a further, welcome element of diversification in the face of risk. Yet, as pertains to those directly involved in this market, there are also downsides when considering the functioning of the financial system as a whole.
The first of these has to do with a sudden drying up of liquidity. In this regard, interdependencies again suggest themselves. Institutions depend on market liquidity to execute their investment strategies and to undertake risk management. Markets in turn depend on institutional risk capital for market-making. In this way, market liquidity and funding liquidity are fundamentally interdependent 21 and the interactions between them can be powerful.
Moreover, particularly in times of stress when concerns about counterparty risk tend to rise, these interactions can also be discontinuous. We have observed such a phenomenon in recent weeks, triggered by an unexpected worsening in the subprime mortgage market in the United States. The underlying problem is opacity, particularly for complex instruments like collateralised debt obligations.
There are two ways in which this increases uncertainty.
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The first has to do with valuation problems. Not only is valuation difficult, as noted above, but such point estimates can be highly misleading in that they ignore higher moments of the probability distribution of the expected returns. As a general rule, we do not know where the credit risk implicit in securitised lending goes. We presume it has gone to those best placed to manage it, but it might also rest with the least well informed, the most gullible or the most adventurous in terms of leverage.
There could also be hidden elements of unwelcome concentration. This could add off-balance sheet exposures to property to on-balance sheet exposures, which are already quite high in many countries. The combination of these two forms of uncertainty make potential losses particularly hard to estimate. In such an environment, there is an increased potential for almost anyone to become suspect as a counterparty. And an added recent concern, particularly with respect to larger financial institutions, has been that many of them are known to have substantial obligations to provide liquidity to others should the need arise.
A sudden increase in such concerns effectively led the global interbank market to cease functioning as from the middle of August this year. Suddenly shunned by money market funds, 24 the asset-backed commercial paper ABCP market dried up. Banks, fearful that they would have to provide liquidity to those no longer having access to the ABCP market, began to hoard cash and withdrew from the term interbank market.
Moreover, with the spread between Libor and the policy rate rising to levels not seen since , this put pressure on a whole host of interrelated markets, most notably those for forward foreign exchange contracts and interest rate swaps, both of which are priced off Libor. Difficulties such as these underline the fact that we do not yet live in a perfect financial world and that shocks can both originate and propagate in unexpected ways.
This issue is not mentioned in the Green and Wachter paper, in effect being reserved for later papers. Yet the issue of the possible interrelationships between the financial and real sectors of the economy deserves to be highlighted up front. The fundamental question is whether the housing finance revolution has contributed to the decline in the household saving rate seen in many countries and, if so, whether there is some potential for a rebound.
There are a number of reasons to think a rebound is likely. First, the largest declines in household saving do seem to have been in those countries with the most "liberal" lending environments, implying that there has been a link between access to credit and the propensity to spend. Thus, should there be a growing unwillingness to borrow further say, due to accumulated debt levels, or an overhang in the stock of houses and cars already purchased or a growing inability to do so say, due to falling collateral values or tighter lending standards this might well lead to a reversal of earlier consumption trends.
Second, to the extent that consumers have in recent years been enabled, by the removal of earlier credit constraints, to more optimally allocate spending over time, there must by definition be a later period of more subdued spending. Third, at the level of theory, it is not at all evident that an increase in house prices constitutes an increase in national wealth, since the cost of housing services rises pari passu with the price of a house.
Some micro data that have been collected for a limited number of countries do indicate that it is wealthier people that account for a disproportionate amount of outstanding mortgage debt. To some, this implies a greater capacity to continue spending, even in the face of a turn in the credit cycle. A counterargument notes that a weakness in the housing market does seem empirically to have significantly reinforced economic downturns in a number of countries.
Unfortunately, we have no historical data to confirm that this past vulnerability reflected a more equal distribution of debt than what we observe today. In sum, the jury is still out, though the time for its return does seem to be rapidly approaching. Borio, C : "Market distress and vanishing liquidity: anatomy and policy options", in A Persaud ed , Liquidity black holes: understanding, quantifying and managing financial liquidity risk , Risk Publications, December. Borio, C and K Tsatsaronis : "Accounting and prudential regulation: from uncomfortable bedfellows to perfect partners?
A more extensive version is also available as "Accounting, prudential regulation and financial stability: elements of a synthesis", BIS Working Papers ,no , September Borio, C and W White : "Whither monetary and financial stability? The implications of evolving policy regimes", in Monetary policy and uncertainty: adapting to a changing economy , proceedings of a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, August , pp Frankel, A : "Prime or not so prime?
Muellbauer, J : "Housing, credit and consumer expenditure", paper presented at the Jackson Hole Symposium "Housing, housing finance, and monetary policy", sponsored by the Federal Reserve Bank of Kansas City, 30 August-1 September. Rajan, R G : "Has financial development made the world riskier? Shiller, R J : "Understanding recent trends in house prices and home ownership", paper presented at the Jackson Hole Symposium "Housing, housing finance, and monetary policy", sponsored by the Federal Reserve Bank of Kansas City, 30 August-1 September.
In addition to this published report, the Working Group on Housing Finance has held regional meetings on recent development in housing finance in Asia and in central and eastern Europe, and is currently organising a third meeting to be held in Latin America. A publication summarising the findings from all these meetings will follow. See Borio and White Generally, bankruptcy regimes in these different countries can be similarly classified. See Frankel et al Since credit scores also increase as the evaluated value of the house rises relative to the size of the mortgage, another endogenous element comes into play which can further increase the amplitude of the housing cycle.
See Frankel They were also characterised by heavy physical investment in the late s. This support, however, has also been extended to other forms of consumer credit. As shown by the experience in Korea, and a number of other Asian countries, there is evidence that in some cases the process got out of hand; see Kang and Ma It could be contended that the "Great Moderation" led not only to lower expectations of inflation helping to lower interest rates , but also to expectations of lower volatility for both inflation and output growth.
If so, this might in turn have increased the appetite for risk-taking and debt accumulation.
One problem with this hypothesis is that, whereas aggregate macro statistics have indeed been more stable in recent decades, income at the level of the household seems to have become more volatile. See Kohn and Dynam Perhaps less well recognised is the exposure of many households, particularly in central and eastern Europe, to exchange rate changes. In that region, it has become quite common practice to take out mortgages denominated in euros or Swiss francs. This raised the issue of reputational risk "break the buck" were they in turn not able to redeem liabilities at par, as they had always done.