Relationship lending and competition: Higher switching cost does not necessarily imply greater relationship benefits

This paper studies relationship lending in a framework where the cost of switching banks measures the degree of banking competition. The relationship lender’s (insider bank’s) informational advantage creates a lock-in effect, which is at its height when the switching cost is infinitesimal. This is because a low switching cost gives rise to a potential adverse selection problem, and outsider banks are thus reluctant to make overly aggressive bids. This effect gradually fades as the magnitude of the switching cost increases, which de facto reduces the insider bank’s profits. However, after a certain threshold in the switching cost, the insider bank’s ‘mark-up’ begins to increase again. Hence, relationship benefits are a non-monotonous (V-shaped) function of the switching cost. The ‘dynamic implication’ of this pattern is that relationship formation should be more common under extreme market structures ie when the cost of switching banks is either very low or sufficiently high. Recent empirical evidence lends support to this prediction.relationship lending, switching cost, banking competition

Asymmetric information in credit markets and entrepreneurial risk taking

The paper constructs a search-theoretic model of credit markets with a bilateral trading mechanism that enables the manageable introduction of asymmetric information. Borrowers´ success probabilities are unobservable to financiers, but the degree of risk in observable projects can be used as a sorting device. We find that the efficiency of a perfect Bayesian equilibrium depends negatively/positively on the credit market ´tightness´/liquidity. In general equilibrium, where the underlying market conditions are endogenously determined, steady states with greater credit market tightness are always associated with increasingly excessive investment in risky projects. Since tighter market conditions also imply less intense competition among financiers, the commonly asserted trade-off between competition and efficiency does not emerge. Tighter monetary policy is shown to worsen the adverse effect of informational frictions on efficiency.credit market; asymmetric information; search; risk taking

Results and discussion

In this chapter, the interdisciplinary synthesis of the results of the BERAS project is presented and discussed. First, the effects of localisation and enhanced recycling on the ecological, economic and social dimensions of sustainability based on the case studies are reported, the cases where food systems and farms studied in their present state. Thereafter, the positive additional effects on sustainability obtainable by further promotion of localisation and recycling in the cases are suggested. The impact of total conversion to recycling organic agriculture is then considered. Obstacles to and solutions for localisation and recycling are identified. An finally, on the basis of these, conclusions about the sustainable way to localise and recycle are presented

Introduction

This volume consists of two papers approaching the question of social sustainability in the context of alternative food systems. Both papers originate from Beras project, and consequently have their empirical base on case studies conducted within the Baltic Sea region

Congregations and rural development The case of the Evangelical Lutheran Church of Finland

Approximately 84 percent of Finns are members of the Evangelical Lutheran Church. Most of the Church’s 562 congregations are located in rural areas. In local communities Church congregations typically play a significant role, providing job opportunities, offering various services and promoting social and mental welfare. This paper examines the role that the Evangelical Lutheran Church of Finland and its congregations have in rural development. The activities of the rural congregations are examined, firstly, from the point of view of rural development on the whole. What is the potential of the congregations in rural development? Secondly, the role of congregations in rural development is examined by taking into consideration the religious motivations and justifications that the Church and congregations give for their social action.religion, Evangelical Lutheran Church of Finland, congregations, rural, development, community attachment, social sustainability, Community/Rural/Urban Development,

Deposit insurance, moral hazard and market monitoring

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. JEL Classification: G21, G28banking, Deposit Insurance, Market Monitoring, Moral Hazard

Forecasting the Electronification of Payments with Learning Curves: The Case of Finland

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.payments; electronification; learning curves

Finnish Deposit Banks 1980–1993: Years of Rapid Growth and Crisis

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.deposit banks; banking crisis; financial deregulation

The effect of a transaction tax on exchange rate volatility

We argue that a transaction tax is likely to amplify, not dampen, volatility in the foreign exchange mar-kets. Our argument stems from the decentralised trading practice and the presumable discrepancy be-tween ‘informed’ and ‘uninformed’ traders’ valuations. Since informed traders’ valuations are likely to be less dispersed, a transaction tax penalises informed trades disproportionately, leading to increased volatil-ity. Empirical support for this prediction is found by investigating the effect of transaction costs on the volatility of DEM/USD and JPY/USD returns. High-frequency data are used and an increase in transac-tion costs is found to have a significant positive effect on volatility.transaction tax; exchange rates; volatility