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Financial stability and financial risks

Essays in Payment Systems and Financial Stability

This thesis consists of three papers within the field of payment systems and banks' financial stability.The first paper The Topology of Danish Interbank Money Flows is joint work with Morten L. Bech. It explores the first topological analysis of Danish interbank money market flows. We identify two different networks; 1) the money market network, which consists of overnight money market loans 2) the payments network consisting of all other transactions, primarily the settlement of customer driven transactions and banks' proprietary transactions. The structure of these two networks differs as the types of transactions differ across the networks. Furthermore, seasonal effects and temporaneous stops in the settlement process affect the structure of the networks.The results in the second paper Competition from Settlement Banks in RTGS-Systems: The Case of Indirect Settlement imply that it can be an optimal choice for the banks to settle payments outside of a Real Time Gross Settlement (RTGS)-system. Indirect settlement via a settlement bank enables non-members to settle transactions to banks that are members of a RTGS-system. Three market equilibria can arise; 1) all banks settle indirectly via the settlement bank, 2) all banks settle directly within the RTGS-system or 3) large banks settle directly and small banks settle indirectly. However, 1) and 2) are the only possibilities, when the settlement bank obtains a higher profit in 1) than in 3). The market solution is inefficient in the sense that it differs from the social planner's solution. The market solution changes, but is still inefficient, when including risk of illiquidity for the banks and the settlement bank.The third paper is Financial Soundness in Danish Banks: Does the Composition of Customers Matter? To my knowledge, this is the first paper that analyzes the relationship between the banks' financial soundness and their lending to specific industries and sectors. The financial soundness of banks is measured by the Z-score technique, which combines three different indicators for bank health in one number. The results show that the impact of the customer composition is surprisingly small both for industries and sectors. What really matters is business cycle effects and the bank size.