4.5 Impact of the changes in the banking system’s market structure on payment systems
Changes in the market structure of the banking sector exert an impact on the operation of payment systems and on the market of payment services as well. Recently, there have been reports of certain financial institutions exiting the Hungarian market that are active banks within payment systems. This exit could occur in several different scenarios, but one in which they suddenly cease all operations in Hungary is not plausible. The least probable form of exit is a gradual one extending over several years, while a more probable one is the sale of banks in one or several portions. A combination of the two is also an option, with banking activities separated into two distinct parts. One would be the good portion, and the other the bad portion, the latter written off by the original owner as loss and gradually unwound. The following section presents the impact on Hungarian payment systems of four exit scenarios for a bank situated in the upper third of the market in terms of size. The impact of a larger bank’s exit on the payment systems depends on numerous factors; nevertheless, neither potential scenario is expected to generate a substantial increase in risks. Changes in payment system participants could impact system turnover, system concentration, the group of critical participants,44 the degree of clearing and settlement risk and systemic risk, depending on to whom the exiting bank
transfers its payment operations. Besides a gradual exit, three sales scenarios are possible. In the first scenario, one of the large banks remaining in Hungary would acquire the exiting bank, while the second scenario would consist of a small or medium-sized bank, or possibly cooperative society financial institutions acquiring the exiting bank. In the latter scenario, these participants would presumably be able to acquire portfolio portions and smaller units. In the third sale scenario, a new banking actor would turn up on the Hungarian market and take over the operations of the exiting bank (Table 5).
a) Unwinding In a scenario of gradual unwinding of activities in Hungary, the bank’s payments will also gradually shift to the other participants remaining in the financial market. In this case, the decisions of clients of the exiting bank would determine where payments would be channelled depending on their choice of payment service provider. Two extreme cases are possible. In one scenario, all clients choose the same bank; in the other, they choose equally among all the remaining banks. The most probable scenario is one where the clients of the exiting bank choose among the remaining payment service providers consistently with their prevailing market share. This could lead
Table 5 Impact on Hungarian payment systems of the exit of a bank situated in the upper third of the market in terms of size Scenario
Turnover of the payment systems
System concentration
Group of critical participants
Risks (clearing and settlement risk and systemic risk)
Unwinding
turnover will decrease slightly
concentration of large banks will increase slightly
individual liquidity needs of the remaining banks would not rise materially
risks would not be increased
Sale to a large bank
turnover will decrease significantly
concentration of large banks will increase significantly
probably would not need to increase liquidity
clearing and settlement risk could increase, systemic risk will increase
Sale to small or mediumsized banks
turnover could decrease slightly
concentration will not change in the short term
liquidity need to be increased, change in liquidity management
clearing and settlement risk will increase, systemic risk will not change
Sale to a new market participant
turnover will not change in concentration will not the short term change in the short term
will not change
risk level will not change
44
The group of critical participants includes the clearing system participants the default of whom could substantially increase systemic risk.
Payment Systems report • June 2014
45
