Archive for August 5th, 2019

The situation in the (Slovenian) banking system remains good, while risks have increased?

August 5, 2019

One is increasingly seeing how central bankers are saying both things at the same time:

The situation in the banking system remains good, while risks have increased

The Bank of Slovenia finds that the situation in the banking system remains good, according to the latest information, even as risks have increased. The profitability of the Slovenian banking system increased again, while this year has also seen growth in the balance sheet total and bank lending activity. The quality of the credit portfolio is continuing to improve, most evidently in the corporate segment. The capital adequacy of the Slovenian banking system remains comparable to the euro area average. The Bank of Slovenia draws attention to increased risks: while economic growth gradually slows, the key challenge for the banking system remains generating stable income in the low interest rate environment.

Call it Economists’ English!

It also suffers from these behavioral biases. You ask a fund manager and she always says we are doing well and risks have increased but they lie elsewhere. Now it cannot be the case that everyone is doing well and yet risks are rising.

Sweden’s march towards a cashless economy got a slight jolt

August 5, 2019

As one thought Sweden will go cashless in just a few years, there has been some fightback from cashusers.

John Detrixhe reports that notes and coins in circulation has gone up by 7% for the first time in 10 years:

Sweden is at the vanguard of countries embracing digital payments, so much so that the Scandinavian country could go effectively cashless in less than four years. In 2018, however, the amount of banknotes and coins in circulation increased for the first time in more than a decade.

Swedish banknotes and coins in circulation rose 7% last year, to 62.2 billion krona ($6.5 billion), according to the European Central Bank. It was the first yearly increase since 2007; the value of cash in circulation has dropped by around 45% over that period.

Are Swedes falling back in love with cash? Probably not. Groups that represent seniors and other vulnerable people have pushed backagainst the country’s rapid shift to digital payments, but last year’s uptick in cash circulation is due, in part, to technical factors. Namely, there was a currency overhaul in which old banknotes and coins could be exchanged for new ones (pdf).

Some Swedes may also have boosted their personal holdings of banknotes and coins in case of a crisis. The Swedish Civil Contingencies Agency recently recommended that Swedes put aside some cash in case of an emergency, such as a data center glitch that causes payments systems to go offline, or terrorism or a cyber attack.

However, at best this has halted the march a bit:

These factors are probably one-off instances, as Swedes continue to switch to card payments and mobile payment apps like Swish. This puts government officials in a tough position, as not everyone is ready for digital transactions. Poorer people and the elderly tend to rely on cash. As more and more payments take place through smartphones (even going to the toilet in Sweden can require an app), it can be difficult for people who aren’t digitally savvy to keep up. Others want to preserve their privacy, or simply want to keep their payment options open.

All eyes on Sweden..

The structure of global trade finance: Evolution from market based to bank based

August 5, 2019

Olivier Accominotti and Stefano Ugolini in this piece look at evolution of global trade finance.

Trade finance is the oldest domain of international finance. From the very beginnings of the history of international commerce, merchants and firms have been in need of working capital in order to finance their commercial transactions and have looked for methods to reduce the risks involved in long-distance trade. However, relatively little is known about how trade finance evolved over the very long run. In a recent study, we review the main developments in international trade finance from the Middle Ages to today and compare its structure and governance across time (Accominotti and Ugolini 2019). Our goal is to understand whether alternative structures existed in the past that might provide regulators with insights on how to design more resilient trade finance.

They say that earlier trade finance was mainly through bills of exchange and was more market driven. Now it is mainly driven by Letters of Credit via banking system:

The 2008 crisis has revealed how banking and liquidity problems can have far-reaching consequences on global trade. This column reconstructs the evolution of global trade finance from the Middle Ages until today. Just like in medieval times, today’s global trade is predominantly financed through banks so that banking problems automatically transmit to international trade. In contrast, from the 16th to the 20th century, trade finance was mostly market-based. The decline of market-based trade finance was triggered by major geopolitical shocks.

However, much of this market was centralised in London. Now this bank-based system is widely spread:

The long-run evolution in the structure of international trade finance has implications for its governance. In the 19th century, the global trade finance market was highly centralised and regulation was exercised by the leading political and economic power of the time – the UK. London’s monopoly over the trade finance market was criticised by potential competitors as it granted UK financial institutions a significant rent. By contrast, the more decentralised structure that prevails nowadays makes international control over the trade finance market less feasible. While this market structure clearly has advantages, it also makes exporting and importing firms more dependent on local credit conditions and pushes back the governance of the trade finance market into a sort of anarchy.

Hmm.. 


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