Browsing by Author "Financial Markets Department"

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  • Andersen, Kaare Guttorm; Kauko, Karlo (1996)
    Suomen Pankin keskustelualoitteita 13/1996
    The possibilities to improve households' eligibility for long-term housing loans at fixed interest rates has been a current topic of public discussion.Yet, credit institutions have difficulties in granting such loans, unless they themselves can acquire fixed-rate funding.In many cases, the only feasible way for them to raise such funding is to issue bonds.In a number of countries, such arrangements are already in use. In this paper we present a cross-country study of housing finance by mortgagebacked bonds.The paper describes and analyses mortgage credit markets in Denmark, Sweden and the United States of America with respect to the institutional structure, loans and bonds characteristics, legal framework and the security underlying the system.We have found that all three markets differ and that these differences originate from the respective countries' national characteristics and financial histories.In Sweden and the United States in particular, the public sector has been involved in developing the system. Generally, long-term credit is offered in all three countries through relatively well-functioning, efficient markets. However, certain problems are common to all.First, the number of outstanding bond series is relatively large.Second, in many housing loans, the borrower has the option to repay the debt prematurely.In these cases, the credit institution may have to avoid maturity matching problems by issuing bonds with unknown maturity. We briefly review the history and present circumstances of Finnish bond issuing credit institutions to elucidate why such institutions play a marginal role.Long ago, bond-issuing mortgage institutions were an essential part of the Finnish financial market, but legislative obstacles to their operations almost killed the industry after World War II.The tax system favoured ordinary banks, and bond emissions were restricted by government regulations.Now, these legal obstacles have been abolished.In the light of both foreign and past domestic experience, such institutions have a market niche.Finally, we discuss some of the problems related to setting up a bond- financed mortgage credit market in Finland. Key words: Housing loans, bonds, mortgage banks
  • Jokivuolle, Esa; Peura, Samu (2000)
    Suomen Pankin keskustelualoitteita 2/2000
    We present a model of risky debt in which collateral value is correlated with the possibility of default.The model is then used to study: 1) the expected amount of debt recovered in the event of default as a function of collateral; and 2) the amount of collateral needed to mitigate the riskiness of a loan to a desired degree.The results obtained could prove useful for estimating recovery rates required by many popular models of credit risk and for determining collateral haircuts in debt transactions.The analysis also generates testable predictions of the behaviour of historical recovery rates of risky debt when collateral is involved.Regulators might benefit from the analysis in developing capital adequacy requirements and reviewing banks' lending standards relative to current collateral values.
  • Kokkola, Tom (1992)
    Bank of Finland Research Discussion Papers 14/1992
    The aim of the survey was to compile a. comprehensive bibliography of relevant work that has been done in this area in recent years in different countries, particulary at central banks. I hope that it will be a guide to literature that will increase expertise in the area of national and international payment systems, and that it will support research and development related to payment instruments and systems. The bibliography is divided into two main sections. The first, including Parts I and II, is based on country and international institution. The other section (Part 111) is a bibliography by subject matler.
  • Pensala, Johanna; Solttila, Heikki (1993)
    Bank of Finland Research Discussion Papers 10/1993
    In this paper we present data collected by the banking supervision authorities on banks' nonperforming assets and loan losses with a view to establishing a consistent database for analysing the condition of Finnish banks and firms.
  • Jyrkönen, Hanna; Paunonen, Heli (2003)
    Suomen Pankin keskustelualoitteita 8/2003
    Retail payment methods are in a stage of rapid development.New service providers and technological developments enable new payment services through a variety of channels.Payment solutions are being developed based eg on the Internet and on mobile phones. Presumably, the use of paper-based payment instruments will decrease further in the future thanks to electronification in the retail payment area. In this paper we focus on card payments in Finland and certain other countries.We also look at Internet- and mobile-based payments and discuss some of the challenges related to the new solutions.The paper ends with a brief discussion of recent changes in Finnish legislation in connection with retail payments. Key words: retail payments, payment cards, Internet payments, mobile payments
  • Paunonen, Heli; Jyrkönen, Hanna (2002)
    Suomen Pankin keskustelualoitteita 10/2002
    The electronification of retail payments has been rapid in Finland. The use of payment cards and credit transfers is very common. However, cash is still used quite widely, especially for small value purchases.There are no statistics available on values or numbers of cash payments, because cash is in open circulation and so it is impossible to trace all cash transactions.In this study we investigate cash usage during the period 1995-2000 and assess the share of cash usage that cannot be explained.According to our findings, the share of unexplained cash usage amounted to about one-half of currency in circulation in 2000.However, with the recent conversion to euro cash, we have additional information on cash usage.Using this new information, we find that the unexplained share of cash usage was less than one-third in 2000. Cash usage has recently been examined by the central banks of Norway and Sweden.We thus compare the results of three central bank studies.In addition, we discuss the euro cash changeover and the extra information now available on cash usage. Key words: cash usage, euro cash changeover
  • Ripatti, Kirsi (2004)
    Suomen Pankin keskustelualoitteita 30/2004
    A Central Counterparty (CCP) is an entity that interposes itself between transacting counterparties - a seller vis-à-vis the original buyer and a buyer vis-àvis the original seller - to guarantee execution of the transaction.Thus, the original transacting parties substitute their contractual relationships with each other with contracts with the CCP.Central Counterparty Clearing has become increasingly popular in Europe, not just in derivatives markets, where, due to the high risk involved, it has been common for decades, but also in equities markets.Within the European Union, the main factor motivating the increased sophistication in clearing arrangements is the ongoing process of European economic integration, ie the euro's introduction, the ongoing organisation of an internal market for financial services and the corresponding objective of creating a pan-European financial infrastructure for payments and securities clearing and settlement.Central counterparty clearing houses exert a broad influence on the functioning of financial markets.They can increase the efficiency and stability of financial markets to the extent that their smooth functioning results in a more efficient use of collateral, lower operating costs and greater liquidity.As market players actively try to achieve economies of scale and scope with mergers and through harmonising their technical processes, they inevitably have had to focus on one of the most fragmented areas in Europe's securities market infrastructure - clearing and settlement.Because of the importance of its role, a CCP must have sound risk management.The CCP assumes responsibility in the aggregate and reallocates risk among participants.Moreover, if the CCP fails to perform risk management well, it can increase risk in the markets.While the big market players dominate the current CCP market in Europe, it is not only the big players who can benefit from a functioning CCP.With the right structure, a CCP enables small players to stay in the market and makes it possible for issuers in a regional marketplace to achieve market funding. Indeed, this is the tendency currently seen in the newest EU member states - and one of the main arguments against the single European CCP model.Although, the purpose has been to leave CCP questions to market participants, regulatory, oversight and supervisory issues can drive the actions of market participants.Indeed, authorities must sometimes be actively involved in boosting a CCP project to keep their home markets competitive.This may well be the situation faced by the Nordic/Baltic market in the near future.Thus, this paper attempts to give a neutral evaluation of the risks and benefits related to the functionality of CCPs in integrating markets and construct a framework for possible future risk-benefit analysis in a Finnish/Nordic-Baltic clearing and settlement infrastructure that incorporates a CCP solution.This is an updated version of a Bank of Finland working paper (Financial Markets Department 01/04).1 Key words: central counterparty clearing, clearing, settlement, securities markets, infrastructure, integration JEL classification numbers: G15, G20, G28, G33, G34
  • Putkuri, Hanna (2003)
    Suomen Pankin keskustelualoitteita 15/2003
    Since 1 January 1999 the ECB has conducted a single monetary policy in the euro area, but the mechanisms by which and the extent to which monetary shocks are transmitted into prices and real economic activity may vary from country to country.This paper investigates how and to what extent the impact of monetary policy depends on national features of financial systems.The main interest is in examining whether the bank lending channel of monetary policy results in asymmetric loan supply reactions on the aggregate level across countries. The variety of transmission mechanisms suggests that the potency of monetary policy may depend on several country-specific factors.On the basis of descriptive analysis, the present Member States seem to differ considerably in terms of their financial systems.The econometric analysis using aggregate data on a panel of twelve countries supports the view that some of these differences may lead to cross-country asymmetries in responses to the common monetary policy.In particular, a larger size and a lower degree of capitalisation of a banking sector are found to strengthen the bank lending channel on the aggregate level. Key words: EMU, monetary transmission, bank lending channel, panel data analysis
  • Saukkonen, Erja (1995)
    Suomen Pankin keskustelualoitteita 30/1995
    This paper is a study of default risk on Finnish government debt. The objectives of the study are to estimate the size of the default risk and to shed some light to the causes of default risk, using simple regression runs.To estimate the Finnish government default risk premium, we measured the interest rate differential on Finnish government DEM- and USD-denominated bonds compared to respectively German and US government bonds over the period October 1991 February 1995.For the sake of comparison, we also measured the interest rate differential between Finnish government FIM-denominated bonds and German government bonds.Our results indicate that for the period studied the default risk premium on the Finnish government foreign-currency denominated debt was quite small, but by no means trivial and clearly not constant.The default risk premium on DEM-denominated debt was a small fraction of the differential for FIM-denominated debt.Our results provide strong evidence that the default risk premium was mainly determined by the level and growth rate of government debt and was not related to the general economic indicators (GDP and current account).
  • Hyytinen, Ari; Takalo, Tuomas (2000)
    Suomen Pankin keskustelualoitteita 10/2000
    Transparency regulation aims at reducing financial fragility by strengthening market discipline.There are however two elementary properties of banking that may render such regulation inefficient at best and detrimental at worst.First, an extensive financial safety net may eliminate the disciplinary effect of transparency regulation.Second, achieving transparency is costly for banks, as it dilutes their charter values, and hence it also reduces their private costs of risk-taking.We consider both the direct costs of complying with disclosure requirements and the indirect transparency costs stemming from imperfect property rights governing information and specify the conditions under which transparency regulation can (and cannot) reduce financial fragility. Key words: information disclosure, market discpline, bank transparency, deposit insurance, financial safety net
  • Snellman, Jussi (2000)
    Suomen Pankin keskustelualoitteita 19/2000
    During the 1990s the availability of location-specific retail payment services in Finland declined substantially, but at the same time there was a surge of development of self-service methods. These new methods, which make use eg of mobile phones and the Internet, dramatically increased the availability of payment services that are not tied to location.More traditional forms of payment still exist; for example, the use of cash remains significant.In Europe there are marked differences between countries with respect to the use of different payment methods. Generally, the use of cashless payment instruments has increased during the last ten years, but it seems that payment patterns are still not converging to similar structures. The development of the Finnish retail payment system has long roots, and several factors - eg the salary bank arrangement of the 1960s and the severe banking crisis of the early 1990s - have influenced the development of the current Finnish payment system. In the retail payments area, new technologies are developing rapidly.The success of new forms of payment (based eg on mobile phones) in gaining general acceptance may depend on changes in the nature of consumption.If customer demand increasingly shifts toward virtual goods and services, the demand for new types of payment methods such as electronic money may increase substantially. Keywords: retail payments, electronification, ATMs, Internet banking
  • Bech, Morten L.; Soramäki, Kimmo (2001)
    Suomen Pankin keskustelualoitteita 9/2001
    The paper analyses the severity of gridlocks in interbank payment systems operating on a real time basis and evaluates by means of simulations the merits of a gridlock resolution algorithm.Data used in the simulations consist of actual payments settled in the Danish and Finnish RTGS systems.The algorithm is found to be applicable to a real time environment and effective in reducing queuing in the systems at all levels of liquidity, but in particular when intra-day liquidity is scarce
  • Hietala, Pekka; Jokivuolle, Esa; Koskinen, Yrjö (2000)
    Suomen Pankin keskustelualoitteita 4/2000
    The purpose of this paper is to provide an explanation for relative pricing of futures contracts with respect to underlying stocks using a model incorporating short sales constraints and informational lags between the two markets.In this model stocks and futures are perfect substitutes, except for the fact that short sales are only allowed in futures markets.The futures price is more informative than the stock price, because the existence of short sales constraints in the stock market prohibits trading in some states of the world.If an informed trader with no initial endowment in stocks receives negative information about the common future value of stocks and futures, he is only able to sell futures.Uninformed traders also face a similar short sales constraint in the stock market.As a result of the short sales constraint, the stock price is less informative than the futures price even if the informed trader has received positive information.Stocks can be under- and overpriced in comparison with futures, provided that market makers in stocks and futures only observe the order flow in the other market with a lag.Our theory implies that: 1) the basis is positively associated with the contemporaneous futures returns; 2) the basis is negatively associated with the contemporaneous stock return; 3) futures returns lead stock returns; 4) stock returns also lead futures returns, but to a lesser extent; and 5) the trading volume in the stock market is positively associated with the contemporaneous stock return.The model is tested using daily data from the Finnish index futures markets.Finland provides a good environment for testing our theory, since short sales were not allowed during the period for which we have data (27 May 1988 - 31 May 1994).We find strong empirical support for the implications of our theory.
  • Leinonen, Harry (1998)
    Suomen Pankin keskustelualoitteita 16/1998
    Over the next few years, we will see a pronounced increase in the speed at which payment transactions are executed and in the share of cross-border transactions, particularly in the euro area. Counterparty risks and liquidity needs connected with the transfer of funds continue to evolve and to provoke discussion.The fact that funds transfers occur and systems operate on a real-time and gross basis will significantly alter the operational character and technical solutions in this field.Systems following a daily timetable are being replaced by continuously operating systems, which will have a significant impact on banks' liquidity management.The trend toward immediate real-time payment transactions seems inevitable in the light of present trends. It is generally presumed that RTGS systems operating on a gross basis require more liquidity than netting systems.Liquidity needs depend on payment system structures and payment flows.An even flow of payments requires less liquidity than an uneven flow.Liquidity needs can be significantly reduced by choosing an appropriate pa yment system structure, taking measures to even out payment flows and agreeing on market practices.The pricing, collateral and reserve requirement policies of the central bank affect also the efficiency of alternative payment systems.Thus the overall efficiency of a gross or net system depends on many factors. Factors arguing for a gross system are differences in counterparty risks, lack of reciprocity, steady interday payment flows and stable liquidity needs, both within and between days.Factors favouring net systems are the existence of small and varying counterparty risks and structurally unsteady payment flows that result in large interday variations in liquidity, even though overnight variations may be moderate. Current, daily-oriented practices have focused on overnight liquidity needs.In a continuously operating enviroment, liquidity needs are continuously monitored across time-period borders.This means that banks' liquidity management will in the future operate under a new and broader time perspective. Significant liquidity needs and large counterparty risks are inherent parts of Finland's present funds-transfer solutions. Liquidity can be freed for other uses and counterparty risks reduced by changing the structures.The necessary changes have been agreed and soon we will see fundamental changes in Finnish payment systems. Key word: payment system settlement, gross settlement, RTGS, payment system counterparty risks, payment system liquidity needs
  • Iivarinen, Timo (2004)
    Suomen Pankin keskustelualoitteita 13/2004
    The present European large-value payment systems are on the verge of notable changes.Since they comprise the backbone or basic infrastructure of the whole economy, it is important that the changes are monitored and carried out in a very prudent manner. This paper attempts to analyse this change and provide an understanding of where we stand today and outline some possible prospects.The large-value payment systems are described and analysed in general terms.For the sake of comparison some important large-value payment systems outside of Europe are also examined. It seems that there will be significant changes in the payment systems industry in the near future.Options for many areas are still open but some trends are visible.These trends are: economic integration, increasing pressure from the EU and the regulators to form a single domestic market across the whole EU area, rapidly changing regulatory environment, rapid development of IT, outsourcing of the payment system value chain, increasing emphasis on customer point of view and efficiency. Furthermore, the border line between large- and small value payments could become blurred, TARGET2 brings considerable changes to the present situation, the scope of CLS should be extended, SWIFT system will become industry standard both in cross-border and domestic payments.These developments in the EU might mean, from the Finnish point of view, that the development in several places could go backwards. Key words: payment systems, trends, RTGS systems, large-value payments
  • Jyrkönen, Hanna (2004)
    Suomen Pankin keskustelualoitteita 27/2004
    Finnish payment methods have changed rapidly as payment cards have gained increasing popularity and have, to an extent, replaced cash.This article examines this phenomenon and the trends in cash and electronic payment methods in Finland.It starts with an introduction to the statistical data on different payment methods used at points of sale and their electronification, after which learning curve and dynamic regression models are employed to analyse changes in the share of cash payments.Finally, forecasts are presented for the future path of the cash-share.The data indicate that the use of cards, especially debit cards, has increased substantially.For example, in 1984 some 80% of total purchases (in value terms) were made with cash, whereas by 2002 the corresponding figure had dropped below 50%.Estimation results suggest that learning curve models are not suitable for explaining electronification of payment methods in Finland - at least at this stage - whereas the error correction model and its special-case partial adjustment model, coupled with independent explanatory variables, seem to do a better job.A forecast based on the latter indicates that electronification will continue in future and that by 2010 the cash-share of total value of point-of-sale payments will fall to less than 30%.Key words: retail payments, payment instruments, electronification JEL classification numbers: G20, G21, G28
  • Hyytinen, Ari; Toivanen, Otto (2000)
    Suomen Pankin keskustelualoitteita 9/2000
    Whether or not banks are engaged in ex ante monitoring of customers may have important consequences for the whole economy.We approach this question via a model in which banks can invest in either information acquisition or market power (product differentiation). The two alternatives generate different predictions, which are tested using panel data on Finnish local banks.We find evidence that banks' investments in branch networks and human capital (personnel) contribute to information acquisition but not to market power.We also find that managing customers' money transactions enhances banks ability to control their lending risks.
  • Leinonen, Harry; Soramäki, Kimmo (1999)
    Suomen Pankin keskustelualoitteita 16/1999
    The operating speed of a payment system depends on the stage of technology of the system's communication and information processing environment.Frequent intraday processing cycles and real-time processing have introduced new means of speeding up the processing and settlement of payments.In a real-time environment banks face new challenges in liquidity management.They need to plan for intraday as well as interday fluctuations in liquidity.By employing various types of hybrid settlement structures, banks may be able to even out intraday fluctuations in liquidity demand.The aim of this study is to develop a framework for analysing fluctuations in liquidity demand and assessing the efficiency of different settlement systems in terms of speed and liquidity needs. In this study we quantify the relationship between liquidity usage and settlement delay in net settlement systems, real-time gross settlement systems and hybrid systems, as well as the combined costs of liquidity and delay in these systems.We analyse ways of reducing costs via optimization features such as netting of queues, offsetting of payments and splitting of payments.We employ a payment system simulator developed at the Bank of Finland, which enables us to evaluate the impact of changes in system parameters and thus to compare the effects of alternative settlement schemes with given payment flows.The data used covers 100 days of actual payments processed in the Finnish BoF-RTGS system.Our major findings relate to risk reduction via real-time settlement, effects of optimization routines in hybrid systems, and the effects of liquidity costs on banks' choice of settlement speed.A system where settlement takes place continuously in real-time and with queuing features is more efficient from the perspective of liquidity and risks than a net settlement system with batch processing.Real-time processing enables a reduction in payment delay and risks without necessarily increasing liquidity needs. Participants will operate under immediate payment/settlement if liquidity costs are low enough relative to delay costs and if the liquidity arrangements are sufficiently flexible.The central bank can therefore support risk reduction and payment speed objectives by providing low cost intraday liquidity as well as more flexible ways for participants to add or withdraw liquidity from the system. Optimizing and gridlock solving features were found to be effective at very low levels of liquidity.The efficiency of the different optimization methods for settlement systems are affected by the actual flow of payments processed.Gains from netting schemes with multiple daily netting cycles were found to be somewhat more limited.Key words: payment systems, clearing/settlement, liquidity, efficiency, gridlock
  • Saarinen, Veikko; Tanila, Kirsti; Virolainen, Kimmo (1996)
    Suomen Pankin keskustelualoitteita 2/1996
    This paper is an overview of domestic payment and settlement systems in Finland.It contains an up-to-date description of institutional aspects of payment systems, payment media used by non-banks, interbank exchange and settlement circuits and securities settlement systems.At the end of the paper, annual statistics are presented on payment and settlement systems and on payment media for the years 1989-1994 Keyword: clearing, settlement, payment media, Finland
  • Pauli, Ralf (2000)
    Suomen Pankin keskustelualoitteita 6/2000
    Is commercial banking in the traditional sense obsolete?Are we in fact witnessing the emergence of a fundamentally new era of finance and payments intermediation?These questions are raised in this paper.Instead of a formal analysis, an attempt is made here to approach these questions from a historical perspective and a practitioner's standpoint.Which factors have in the course of time shaped the role of commercial banks and are present trends in the market eroding the foundation of traditional commercial bank functions to the extent that we are actually entering upon something that is new in a fundamental way. Of course, we will not get definitive answers.The conclusion arrived at in the paper is that banks will remain important intermediators of financing and payments, and that these functions will constitute the core of banking also in the foreseeable future. This however does not exclude structural changes in the banking sector as a whole and in the activities of individual banks.On the contrary, these are essential to the survival of banks. The paper analyses prospects for new media of exchange replacing deposit money.It is concluded that, as regards asset transfers in the capital market becoming a dominant medium of exchange (in the spirit of the New Monetary Economics), there are serious impediments. Payment flows have increased sharply at the same time as the whole banking sector has been making the adjustment to a more competitive situation.This has accentuated the role of the central bank as a payments service provider to the banks and particularly as an overseer of payment systems.The central bank's role as payment systems overseer is likely to receive even greater emphasis in the future.The central bank's oversight mandate requires further specification as regards the payment systems to be overseen and how oversight relates to banking supervision. Our analysis demonstrates also that current trends in the market are not weakening but rather are strengthening the traditional interrelationship between banks and the central bank in the field of payments.The roles of the banks and the central bank still need fine tuning.It is concluded that payment systems can best serve the rest of the economy if the prime responsibility to develop the systems is left to the private sector, while the central bank has a recognized position as a public policy entity that will do what is necessary to achieve a sufficient level of safety and efficiency. Keywords: payments, oversight, medium of exchange, bank, central bank