marius jurgilas : who are non - banks and why are they important for us? opening remarks by mr marius jurgilas, member of the board of the bank of lithuania, at the conference “ non - banks in payment market : challenges and opportunities ”, organised by the bank of lithuania and the sveriges riksbank, vilnius, 8 october 2015. * * * it is a great pleasure for me to open the conference on non - banks in payment market. in 2007 federal reserve bank of kansas city hosted a similarly titled conference. it was the time when europe was still debating the modalities of the upcoming psd and steve jobs just introduced the first iphone to the world. now we have iphone 6 and psd2 and because of the another innovation by apple over that time – applepay the link between the two is relevant more than ever. let me briefly elaborate on two points : who non - banks are and why they are important for us. in general non - banks in the payment market mainly refer to the financial institutions that facilitate payment transactions for end - users. sometimes the definition goes even further and includes those entities that provide technology for the banks to facilitate for those payments. both groups are relevant as they deal with different problems. overall these institutions do not engage in financial intermediation or credit risk taking, like shadow banks, which do. we could start the list of non - banks in payments with traditional post offices that have been more or less active in payment market for ages. many have turned into banks or quasi banks by now. then we have electronic money institutions and payment institutions that joined the club not long ago. some of them tried to mimic banks ’ payments model and failed. a new wave of non - banks emerged in the age of smart phone. equipped with the latest technology and outof - box thinking they made a bald step – implemented new business models, in sectors where banks were slow to act. nevertheless, many early initiatives are struggling for a number of reasons. regulators as well as the industry need to understand what is still missing. payment initiation services as defined in the psd2 are a good bet. but the outlook is not all dark shades. last year the economist featured an article on the future of payments titled “ payments : the end of monopoly ”. the title speaks for itself – banks are losing the grip on payments market. but according to mckinsey 34 % of global profits banking industry is making from payments. therefore

following a crisis may also be viewed as a matter of morality and fairness. when the authorities bail out banks, some parties are spared the consequences of their own choices. bailing out investors and owners using public funds conflicts with people ’ s ordinary sense of fairness. moreover, government support for insolvent banks undermines the stability of the financial system. when the authorities bail out banks, the banks can transfer their losses to others, while reaping the gains in good times. a description of externalities in the banking sector and how they may justify regulation is found in borchgrevink et al. ( 2012 ), “ why regulate banks? ” norges bank staff memo 16 / 2013. bis central bankers ’ speeches when the government assumes a substantial portion of bank risk in this way, a problem arises that we economists refer to as moral hazard : if there is a widespread perception that the authorities in reality stand behind banks, banks may take insufficient account of the risk of losses when making decisions. in particular, the risk that things can go horribly wrong may be underestimated, because banks do not have to bear the consequences of a crisis. by bailing out banks, we in turn reduce the motivation of banks ’ owners and creditors to take full account of the risk associated with their activities. the pricing of risk is easily set too low. banks may therefore end up taking excessive risk. now, the authorities that bail out banks will often require that the former owners forfeit their equity. this means that bank owners should, at the outset, have incentives to hedge against the risk of large losses. but owners ’ risk is limited. it does not cover losses beyond paid - in capital. owners ’ motivation to avoid risk may therefore be weakened at a bank with little equity. the lower the equity capital is, the more serious the problem of moral hazard becomes. an interesting feature of the financial crisis was precisely banks ’ low pre - crisis equity ratios. many large international banks operated with equity of around three percent of their total portfolios. 8 this means that for every dollar or euro the banks owned they invested thirty. it is obvious that the risk inherent in such activity may easily become too high. and the solution is in itself simple enough : the authorities should require higher equity ratios for banks, so that owners must absorb a larger share of the losses if things go wrong. another solution to this might be the one governor rygg chose in his day : close insolvent banks and place the