In effect, all retail payment services are charged at a zero up-front fee,  12  BIS Review 95/2010  except large-value payment transfers through CHAPS 6 (which are typically charged at around £ This charging schedule is not well aligned with marginal costs. It encourages bundling of payment services and the charging of latent or hidden fees on other transactions services – for example, overdraft fees. Explicit charging for retail financial services would increase transparency and reduce the scope for distortions in the use of these services. High returns on treasury management services also present something of a puzzle. These include transactions, information and custodial services to clients. None of these activities are especially expertise-intensive and the market for these services ought in principle to be contestable internationally. (b)  “High risk/high return” business activities  The higher risk activities associated with finance, such as commercial and investment banking, do not on the face of it appear to yield as high returns on equity. Nonetheless these returns, at around 20%, are above levels in the non-financial sector. Investment banking activities are, in risk terms, a mixed bag. They comprise fairly low-risk activities, such as (merger and acquisition) M&A advisory work, with higher-risk activities such as securities underwriting and proprietary trading. To complicate matters, banks’ annual accounts data do not differentiate simply between these activities – for example, between market-making and proprietary trading activities in fixed income, currency and commodities (FICC) and equities. Chart 37 provides a revenue breakdown of US investment banks’ activities.

It is possible to further decompose ROE to provide additional insight into how banks increased reported returns as follows:  BIS Review 95/2010  9  Banks can boost ROE by acting on any of the terms on the right-hand side of equation (1.1): increasing assets relative to capital (financial leverage), holding a larger proportion of capital 4 other than as common equity (common equity margin), or assuming a greater degree of risk per unit of assets (return on risk-weighted assets, RoRWA) – leveraging assets, leveraging capital structure or leveraging regulation. Table 4 shows two of the elements of this breakdown for the major global banks – leverage and unit risk. For most banks, the story is one of a significant increase in assets relative to capital, with little movement into higher risk assets (unit risk makes a negative contribution for most banks). Those banks with highest leverage, however, are also the ones which have subsequently reported the largest write-downs. That suggests banks may also have invested in riskier assets, which regulatory risk-weights had failed to capture. Table 5 looks at the third component, the common equity margin, of some of the same global banks. Among at least some of these banks, this margin makes a significant contribution to ROE growth, as banks moved into hybrid Tier 1 capital instruments at the expense of core equity. As such hybrid instruments have shown themselves largely unable to absorb losses during the crisis, this boost to ROE is also likely to have been an act of risk illusion.