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The paper analyses the relationship between deposit insurance, debt-holder monitoring, bank charter values, and risk taking for European banks. Utilising cross-sectional and time series variation in the existence of deposit insurance schemes in the EU, we find that the establishment of explicit deposit insurance significantly reduces the risk taking of banks. This finding stands in contrast to most of the previous empirical literature. It supports the hypothesis that in the absence of deposit insurance, European banking systems have been characterised by strong implicit insurance operating through the expectation of public intervention at times of distress. Hence the introduction of an explicit system may imply a de facto reduction in the scope of the safety net. This finding provides a new perspective on the effects of deposit insurance on risk taking. Unless the absence of any safety net is credible, the introduction of deposit insurance serves to explicitly limit the safety net and, hence, moral hazard. We also test further hypotheses regarding the interaction between deposit insurance and monitoring, charter values and "too-big-to-fail." We find that banks with lower charter values and more subordinated debt reduce risk taking more after the introduction of explicit deposit insurance, in support of the notion that charter values and subordinated debt may mitigate moral hazard. Finally, large banks (as measured in relation to the banking system as a whole) do not change their risk taking in response to the introduction of deposit insurance, which suggests that the introduction of explicit deposit insurance does not mitigate "too-big-to-fail" problems.

The goal of this Master’s thesis was to find an integration framework and process between Cargotec Tampere’s main design office and locally situated design offices. The problem had been that there was no defined process to integrate the local small offices with the main global office at Tampere. Without a defined process and tools it is difficult to achieve good efficiency from the start. The thesis was made with qualitative constructive research methods. The three main research processes were literature review, interviews and two case studies inside Cargotec. For the literature review, three research areas were studied: global engineering networks, virtual teams and supplier integration. From those three areas a synthesis was developed, called the combined theoretical model for design office integration. The interviews covered approximately 15 different people. From the interviews the current situation of integration and the requirements for the practical framework were synthesized. The two case studies on Cargotec’s design office in China and a daughter company, MacGregor, are based on interviews with managers, whose job it was to manage and develop offshored design offices. They are presented as individual evidence on the difficulties and lessons learned. When researching and interviewing employees, it became clear that there were many problems with achieving good integration at Cargotec. First, there had to be a clear sense of what kind of capabilities the new office had. Second, what materials and training should Cargotec give to the new office to match the main office’s capabilities? To improve the situation, an integration framework and three tools were created. The framework and tools are derived from the combined theoretical model. The framework consists of three phases: Survey, Sharing and Verification. The survey phase defines the needs for a new design office, maps and evaluates the capabilities of the prospective design office, and evaluates the offshoring risks. For this, the phase two tools, called current state analysis and risk assessment, were developed. The sharing phase defines and shares all the materials and other resources that the host design office would need to get to the same level with the main design office regarding software, network, skills, material and product knowledge. For this phase, an Excel-tool called the integration package was developed. The last phase, verification, is meant to verify the results of the sharing phase by giving the new design office a pilot task, which tests the new office’s systems, knowledge and communication. The testing of the framework and its tools showed that they were mature enough to be used at Cargotec. /Kir10

This paper analyses cross-border contagion in a sample of European banks from January 1994 to January 2003. We use a multinomial logit model to estimate the number of banks in a given country that experience a large shock on the same day (“coexceedances”) as a function of variables measuring common shocks and lagged coexceedances in other countries. Large shocks are measured by the bottom 95th percentile of the distribution of the daily percentage change in the distance to default of the bank. We find evidence in favour of significant cross-border contagion. We also find some evidence that since the introduction of the euro cross-border contagion may have increased. The results seem to be very robust to changes in the specification. JEL Classification: G21, F36, G15

This paper analyses cross-border contagion in a sample of European banks from January 1994 to January 2003. We use a multinomial logit model to estimate the number of banks in a given country that experience a large shock on the same day (“coexceedances”) as a function of variables measuring common shocks and lagged coexceedances in other countries. Large shocks are measured by the bottom 95th percentile of the distribution of the daily percentage change in the distance to default of the bank. We find evidence in favour of significant cross-border contagion. We also find some evidence that since the introduction of the euro cross-border contagion may have increased. The results seem to be very robust to changes in the specification.

This paper presents the methodological and statistical framework for macro-prudential analysis of the financial condition of the EU banking sector that has been adopted by the European System of Central Banks (ESCB). The framework is also a central component of broader financial stability assessments carried out by the ECB in co-operation with national authorities. The framework has three main building blocks, which draw on a large number of macro-prudential indicators. The first block is designed for assessing the financial condition of the banking sector. The second building block provides a framework for analysing potential sources of risk and vulnerability to which banks are exposed and an assessment of the importance of related exposures. The final part of the analysis deals with the resilience of banks vis-à-vis these different sources of risk and vulnerability. Analysing the impact of the identified risks on banks’ financial condition is the ultimate objective of the ESCB banking sector stability analysis.

The paper analyses the relationship between deposit insurance, debt-holder monitoring, and risk taking. In a stylised banking model we show that deposit insurance may reduce moral hazard, if deposit insurance credibly leaves out non-deposit creditors. Testing the model using EU bank level data yields evidence consistent with the model, suggesting that explicit deposit insurance may serve as a commitment device to limit the safety net and permit monitoring by uninsured subordinated debt holders. We further find that credible limits to the safety net reduce risk taking of smaller banks with low charter values and sizeable subordinated debt shares only. However, we also find that the introduction of explicit deposit insurance tends to increase the share of insured deposits in banks’ liabilities.

We analyse the ability of the distance-to-default and bond spreads to signal bank fragility. We show that both indicators are complete and unbiased and that spreads are non-linear in the probability of bank default. We empirically test these properties in a sample of EU banks. We find leading properties for both indicators. The distance-to-default exhibits lead times of 6 to 18 months. Spreads have signal value close to default only, in line with the theory. We also find that implicit safety nets weaken the predictive power of spreads. Further, the results suggest complementarity between both indicators, reducing type I errors. We also examine the interaction of the indicators with other bank information.

This paper provides an assessment of the degree of integration in banking services in the euro area. It diverges from the typical analysis on integration in the financial sector by focusing on the main financial products and services provided by banks to corporate and personal clients rather than on financial markets. As the “law-of-one-price” concept is often not applicable to banking products and services, a wide range of quantitative and qualitative indicators of integration is used in the analysis. Indicators of integration are reviewed for three product areas: wholesale (unsecured interbank loans and deposits, repo market) capital market-related (corporate finance services, asset management and trading) and retail (directed to households and small firms). The main conclusions are that while the market on wholesale banking services is strongly integrated and integration is advancing at a fast pace in capital market-related activities, market segmentation is still significant at the retail level.

The paper analyses the relationship between deposit insurance, debt-holder monitoring, charter values and risk taking. Utilising cross-sectional and time series variation in the existence of deposit insurance schemes in the EU, we find that the establishment of explicit deposit insurance significantly reduces the risk taking of banks. This finding stands in contrast to most of the previous empirical literature. It supports the hypothesis that in the absence of deposit insurance, European banking systems have been characterised by strong implicit insurance operating through the expectation of public intervention at times of distress. We also test further hypotheses regarding the interaction between deposit insurance and monitoring, charter values and 'too-big-to-fail.' We find that smaller banks and banks with lower charter values and more subordinated debt reduce risk taking more after the introduction of explicit deposit insurance, which supports 'too-big-to-fail', monitoring by debt holders and the moral hazard reducing effect of charter values. JEL Classification: G21, G28

The substitution of noncash (check, giro, and credit and debit card) payments for cash transactions is difficult to gauge because there are no data series on the actual value or volume of cash transactions in any country. However, determining the degree of cash substitution is important because it will negatively affect government seigniorage revenue and, if cash use falls fast enough, may require tax revenues to redeem excess currency holdings. We utilise a novel method for approximating the volume of cash transactions using public information on currency stocks and noncash payments. Applying this method, we estimate how cash has been substituted by other payment instruments in 10 European countries. We also provide a forecast of future cash use by country. We find that the trend in cash substitution across countries is quite similar. However, the countries themselves are at significantly different stages of this substitution process. The spread of debit and credit card payments has been the key factor behind the substitution away from cash as use of e-cash innovation is still in its infancy. Country-specific differences in the substitution process are largely explained by differences in the level of implementation of each country’s card payment technology.

The study analyses the effects on banking competition of the changes in banking delivery and information collection technologies and of the rivalry from outside the traditional banking sector.Key implications for monetary, regulatory and competition policies are also addressed. Evidence is provided that liberalization increased banking competition in Europe.In a mostly deregulated environment, technology is argued to be of major importance for competition, The study argues against the prevalent spatial modelling of banking competition due to the difficulty of representing remote access and nonbank activity.Instead, a novel two-stage model (delivery capacity, then loan and deposit pricing decisions) is developed based on multidimensional differentiation theory.According to the results, benefits that clients derive from branch or ATM proximity, additional outlets, or superior service quality can maintain pricing power for banks.Technological development reduces these benefits and generates a permanent increase in competition.The optimal sizes of branch and ATM networks decline.Network cooperation reduces network sizes, but is not necessarily harmful, as price competition is stimulated. An empirical implementation of the model is presented for the Finnish loan and deposit markets.Banks' pricing power is found to be entirely due to their branch network differentiation and size in the loan markets, and to exist mainly in household lending.In contrast, price coordination was found to likely characterize deposit pricing.The ability to distinguish differentiation from collusion is a new contribution.Banks' pricing advantages were found to be diminishing in all lending and especially deposit-taking activities, following the technological development, which indicates reduced significance of branches for clients. Technological development, growing nonbank activity, deepening capital markets and weakening price coordination are found to enhance the efficiency of monetary policy transmission into lending (and deposit) rates.The results are relevant for the common euro area monetary policy, since they show the dependence of the transmission on particular structural and competitive conditions of the banking system.Finally, deregulation of deposit interest rates insulates loan rates from changes in deposit rates and, contrary to what is often argued, does not make loans more costly.

This paper examines the electronification of noncash payments in Finland and the extent to which noncash payment means are used as substitutes for cash. We model the processes of cash substitution and electronification of payments as 'S'-shaped learning curves and generate forecasts by extrapolating these curves. The 'S'-shaped learning curves fit the data well. Our results indicate that in Finland the cash substitution process as a whole is approaching the saturation point. Although the electronification process is clearly ongoing as regards larger-value bill payments, for small-value point-of-sale payments we seem to have reached saturation. Electronification of payments, having progressed swiftly and extensively in Finland, is already beginning to slow down. We conclude the paper with a discussion of the reasons for this turn of events and of the different factors that affect the speed of diffusion of new means of payment.

In the European Economic Area the home country supervises the activities of its banks, wherever they are operating via branches or across borders, while the host country handles the stability of its financial system and problems stemming from failure or distress. We address two main problems related to the conduct and co-ordination of these two responsibilities. First, the introduction of the euro and the removal of other regulatory barriers is likely to lead to increasing internationalization of banking. In particular in smaller countries, large portions of the banking sector may be supervised by other 'home' authorities. This will make difficult assessing what is happening in the market as a whole and warning about emerging systemic problems. Home supervisors will find it difficult to cover the widening range of countries in which their banks operate. Increasing the information exchanged and co-operation among supervisors would be helpful, but emphasizing public disclosure by banks to enable market discipline to supplement the work of the authorities would help overcome the problem of information considerably, in addition to the favourable impact on incentives to banks for prudent risk management. Second, the interests of home and host supervisors in a crisis may differ and need to be co-ordinated. What is important to the host authority in a small country may be inconsequential to the home supervisor of a multinational bank in a large country. Co-ordination at European level might help.

The paper presents a method of measuring bank differentiation in terms of branch and ATM networks and uses the measures thus obtained to explain the pricing of deposits as well as corporate and household loans. Structural system models of demand and pricing equations are also estimated to separate network differentiation effects from collusion in loan and deposit rates. Pricing power due to network differentiation is found to exist mostly in household lending, while the benefits of differentiation are found to decrease trend-wise in all lending and deposit-taking activities. This result is in line with predictions concerning the technological transformation of services' delivery in banking. Differentiation is found to be the primary source of pricing power in lending, while collusion dominates in deposit-taking. Thus, European liberalization has greater potential to increase the contestability of the deposit market. Identified impacts of technological change imply more efficient pass-through of money market rate changes to loan and deposit rates in the future.

A model of banking competition is developed, in which diffusion of electronic banking (eg pc and phone banking) and nonbank competition (eg mutual funds, retail stores and insurance firms) are studied as factors that diminish the benefits of branch and ATM networks in terms of enhanced demand and pricing power. A structural increase in price competition, a decrease in the variation of loan and deposit rates across banks and a decline in the optimal numbers of branches and ATMs is shown to result. Competition increases permanently unless banks are able to redifferentiate from rivals through novel innovation that compensates for the reduced value of network differentatiation. Capacity collusion is shown to reduce the sizes of branch and ATM networks as well as banks' markups of loan and deposit rates over the money market rate and respective marginal operating costs. ATM compatibility reduces the total number of machines and under certain conditions raises deposit rates. Under strategic complementarity technological transformation and nonbank expansion enhance the transmission of monetary policy into lending rates, as well as into deposit rates, because banks' incentives to change their rates and the sizes of optimal responses increase with respect to changes in the money market rate. If these trends continue to be more pronounced on the deposit side, loan rates will become more insulated from deposit market events and the volatility of banks' netinterest income will increase.

In the European Economic Area the home country supervises the activities of its banks, wherever they are operating via branches or across borders, while the host country handles the stability of its financial system and problems stemming from failure or distress.We address two main problems related to the conduct and co-ordination of these two responsibilities.First, the introduction of the euro and the removal of other regulatory barriers is likely to lead to increasing internationalization of banking.In particular in smaller countries, large portions of the banking sector may be supervised by other 'home' authorities.This will make difficult assessing what is happening in, the market as a whole and warning about emerging systemic problems.Home supervisors will find it difficult to cover the widening range of countries in which their banks operate.Increasing the information exchanged and co-operation among supervisors would be helpful, but emphasizing public disclosure by banks to enable market discipline to supplement the work of the authorities would help overcome the problem of information considerably, in addition to the favourable impact on incentives to banks for prudent risk management.Second, the interests of home and host supervisors in a crisis may differ and need to be co-ordinated.What is important to the host authority in. a small country may be inconsequential to the home supervisor of a multinational bank in a large country.Coordination at European level might help.

Some payment arrangements are more efficient in promoting economic growth in a market-based economy. The payment experience of industrial countries is diverse enough to identify those payment arrangements that provide the infrastructure for sustained growth and the emergence of market-based enterprise. Based on the historical experiences of Europe, Japan, and the United States, a number of Country attributes have led to the intensive use of different payment instruments and a different mix of private and public ownership and payment system participation. Such attributes included country size, population density, banking structure, legal framework, safety, and payment instrument pricing. These attributes explain why Japan relies heavily on cash at the point of sale, but uses electronic payments for bill payments and business transactions. They also are the reason Europe relies on credit-transfer giro payments for all types of transactions and United States instead relies on checks. Finally, the fact that consumer payment needs were not met within the banking system led to the establishment of postal giros in Europe, while untimely business payments led to central bank involvement in payment processing in the United States. Unmet user needs, inefficient payment arrangements, differences in payment instrument costs, and improper pricing of payment services will determine the future structure of payment systems in emerging market economies just as they have determined the evolution of payment systems in industrial countries. The authors discuss these issues and apply the lessons learned to payment arrangements in emerging market economies. Although the evolution of payments has taken decades in industrial countries, emerging market economies hope to complete the process in just a few years, and so will benefit by having a better roadmap for transforming their payment systems.

Table of Contents: Acknowledgements 5 1 Introduction and background 11 1.1 Research methodology 12 1.1.1 Industrial organization, competition and efficiency 13 1.1.2 Oligopoly theory and tacit collusion 14 1.1.3 Shortcomings of the SCP 17 1.1.4 Review of studies testing for SCP in banking 21 1.1.5 NEIO-approach to studying competition 23 1.2 Deregulation and banking competition 26 1.2.1 Spatial model of banks' delivery capacity choices 26 1.2.2 Interpretation of model predictions 30 1.2.3 Banking competition after deregulation - international evidence 34 1.3 Competition policy issues for banking 37 1.4 Background facts on the Finnish banking sector 41 2 Competition tests based on empirical reduced form revenue equations 47 2.1 Testing for competition using reduced form revenue functions 48 2.2 Derivation of testable hypotheses 49 2.2.1 Monopolistic competition equilibrium without threat of entry 50 2.2.2 Monopolistic competition free entry (Chamberlinian) equilibrium 53 2.2.3 Static oligopoly equilibria 57 2.2.4 Summary of empirical hypotheses 58 2.2.5 Empirical reduced form revenue equations 59 2.3 Empirical implementation 60 2.3.1 Empirical model 60 2.3.2 Estimation and data 63 2.3.3 Results 64 2.3.3.1 Individual cross-section data 64 2.3.3.2 Pooled cross-section data 66 2.4 Conclusions 72 2.4.1 Competitive changes in Finnish banking 72 2.4.2 Previous studies 75 3 Testing for shifts in competitive conduct: a switching regression model 76 3.1 Motivation 76 3.2 Empirical model 79 3.2.1 Industry demand and supply relations 80 3.2.2 Empirical specification 82 3.3 Variables, estimation and results 87 3.4 Conclusions 92 4 Oligopolistic interdependence in bank loan and deposit markets 95 4.1 Foreword 95 4.2 Multimarket oligopoly 97 4.2.1 Implications of multimarket contact 97 4.2.2 General duopoly model 98 4.2.2.1 Direct and strategic effects 98 4.2.2.2 Characterization of strategic behaviour 101 4.2.3 Model of price setting duopolists - comparative statics 102 4.2.3.1 Linear demand and strategic complementarity 102 4.2.3.2 Equilibrium price effects 104 4.2.3.3 Equilibrium cross-market profit effects 110 4.3 Empirical behavioral equations ill 4.4 Data and variable specifications 116 4.5 Auxiliary cost and demand function estimations 120 4.5.1 Translog cost function model 120 4.5.2 Empirical measures of production economies 126 4.5.3 Production economies in Finnish banking - empirical results 131 4.5.4 Demand models for bank loans and deposit services 134 4.5.4.1 Demand for bank loans 134 4.5.4.2 Demand for deposit services 135 4.5.4.3 Estimation results 137 4.6 Behavioral equations: estimation and results 137 4.6.1 Average own market price coordination terms 139 4.6.2 Average cross-market price coordination terms 141 4.6.3 Bank group - specific price coordination terms 143 4.7 Summary and conclusions 145 5 Summary and joint conclusions 148 5.1 Price competition in the bank loan market and its evolution over time 149 5.2 Oligopolistic competition in bank loan and deposit markets 153 References 157 Appendices 167

This study investigates the growth of Finnish deposit banks over the period 1980–1993. We examine the growth in balance sheets, lending and deposits of the public as well as major changes in the balance sheet structure. The focus of the study is first on the overall banking industry and second on the commercial, savings and cooperative banks as groups, including a separate treatment of the largest commercial banks. The study ends with a brief comparison of the Nordic countries. Also included is a discussion of changes that have occurred in the banking environment, but the emphasis is on the effects of bank-specific microeconomic factors on the rapid acceleration in the growth of bank lending and on the heating up of competition for market share, which took place after lending rates were deregulated and foreign exchange regulations eased. The micro factors examined are the change in banks' risk profile during the period of rapid growth as well as the various incentives behind the growth and competition for market share. To be sure, changes in the banking environment and macroeconomic developments have played a role in fomenting the banks' profitability crisis in the beginning of the 1990s, but the main reasons for the crisis can be found in the banks' strategic choices.

This paper analyzes factors affecting the pass-through from exchange rates to import prices. The prevailing market ·structure, product differentiation, intertemporal optimization and the role of expectations regarding the exchange rate are the elements whose explicit modelling enable the rationalization of the empirically observed incomplete and sluggish price response to exchange rate movements. Further, recent theories concerning hysteresis in trade prices and quantities are reviewed in order to demonstrate how large exchange rate changes may cause changes in market structure through foreign entry or exit, and/or changes in distribution capacity, and market share investments. These results are then applied to examine the dynamics of price adjustment, which is shown to be the slower the higher is the level of exchange rate uncertainty and the more significant ate the sunk investments required for market entry. An empirical study of export pricing of Finnish paper manufactures is carried out by estimating export price equations based on a mark-up pricing rule and a general error correction model as a dynamic empirical specification. The exchange rate pass-through estimates are significantly incomplete, also in the long run, and distinctly lower in exports to the USA than to West European markets. These results are generally consistent with the derived theoretical results. The huge appreciation of the US dollar during the first half of the 1980's seems to have evoked hysteretic effects in the US market for paper products as well as in Finnish exports to the USA, which show up as significant instabilities in the price equations. However, at the level of aggregate exports there is no clear evidence of such effects "following the devaluations of the Finnish mark in the observation period 1975-1991.