Changes in the financial system – what will the consequences be?
Date
27/02/2015
The current role of banks in the Swedish financial system is extensive. Banks provide a significant share of funding to the real sector but also act as suppliers of trading services to asset managers. Going forward, however, alternative forms of funding and trading may emerge that rely to a lesser extent on bank intermediation.
The Riksbank Study "Structural changes in the Swedish financial system" relies on the list of existing trends in the Swedish financial system to gain insights into how the Swedish financial system could change.
The study notes that an increased diversity of funding sources and a greater variety of ways to trade would be beneficial to the real sector since they imply reduced cost of and increased access to funding and trading. These developments would also imply an increased potential for risk-sharing in the financial sector by spreading the risks across several participants. However, the stability of alternative funding and trading arrangements would rely heavily on the premise that all the parties involved understand and can manage the risks they assume.
These developments would raise the issue of contingent risks for banks as well as the robustness of the system in times of stress. There is a need to increase our understanding of such risks. Banks' capacity to deal with contingent risks, as well as their ability to act as shock absorbers to the rest of the system, requires that banks have excess capital and liquidity before the stress arrives.
By Reimo Juks
The author holds a Ph.D. in financial economics and is an adviser at the Financial Stability Department of Sveriges Riksbank.
