Jukka Topi

Microeconomic and Macroeconomic Influences on Entry and Exit of Firms

We examine the entry and exit process in the Finnish manufacturing industry using a six year panel of three-digit industries. The results show that scale economies form a significant entry barrier, but the evidence on their role as an exit barrier is weaker. Industry growth has a positive influence on entry and a negative influence on exit, but also variables describing the general economic climate have an influence on the entry-exit process. The variables describing the monetary transmission mechanism have an expected influence on entry. However, the role of macroeconomic influences on exit is inconclusive. Both entry and exit have almost unit elasticity with respect to industry size, measured by the number of firms in the previous period. Entry and exit rates are therefore practically independent of industry size.

Transmission of Monetary Policy Shocks in Finland: Evidence from Bank Level Data on Loans

We use a panel of quarterly time series observations on Finnish banks to estimate reduced form equations for the growth rate of bank loans. By allowing for individual bank specific effects in the empirical models we specifically seek evidence of a bank-lending channel for the transmission of monetary policy shocks in Finland. On the basis of our estimation results, we conclude that there is weak evidence in favour of the bank-lending channel for monetary policy shocks. Our data overlaps with the post crisis recovery of the Finnish banking sector with specific government support measures still active during the good part of the sample period. We try to capture the effects of these measures through a policy dummy variable in our empirical models. This policy dummy is highly significant, suggesting that the measures may have contributed to the growth rate of bank loans during the sample period JEL Classification: E51, E52, G21

Strategic Challenges for Exchanges and Securities Settlement

A common feature of major trends in securities and derivative markets is that they facilitate cross-border competition between financial institutions and markets. These trends include financial deregulation, technological developments that increase network externalities and the introduction of the single currency in Europe. This paper discusses future prospects for stock and derivative exchanges and securities settlement systems globally in the light of this analytical framework. The increased contestability of the financial markets opens the way for a completely new situation where economies of scale and network effects enable new systems to challenge existing exchanges and settlement systems. This has already led towards more integrated trading and settlement infrastructure via mergers, alliances, links, agreements and other forms of cooperation between existing infrastructure companies. At the same time new electronic communication networks and electronic exchanges operated by members of exchanges or off-exchange companies and Internet brokers have emerged. We expect that economies of scale and scope and network effects will foster global competition. The business conducted by brokers and exchanges will tend to converge, thus posing a major challenge for the management of these businesses. Trading and settlement services for the most liquid global trading products will, we believe, be provided by limited liability companies that employ efficient governance practices. We anticipate that US stock and derivative exchanges will have to adopt fully electronic trading systems. This might lead to intense competition between exchanges in the US and globally. We also anticipate that European alliances will be based on a more efficient operational model than the models proposed so far. An increase in Internet-routed equity and derivative trades will lead to partial fragmentation of liquidity. As technology advances, we expect pooling of liquidity in one of the networks.

The future of financial markets

List of Tables List of Figures Preface Acknowledgements Introduction The Payment System: Structure, Efficiency, Innovation and Regulation Technical Efficiency in Stock Markets Securities Settlement Systems E-Money: An Addendum References Index

Bank Runs, Liquidity and Credit Risk

In this paper, I develop a model that addresses the links between banks liquidity outlook and their incentives to take credit risk. Assuming that both bank-specific liquidity shocks and credit losses are necessary to provoke bank runs, the model predicts that a bank s incentives to mitigate its credit risk by screening decrease if the probability of a bank-specific liquidity shock declines. This suggests that the benign liquidity outlook prevailing prior to the subprime crisis may have contributed to the lack of screening by banks that has been an important causal factor in the crisis.

Technical Efficiency in Stock Markets

Much of our understanding of the way stock exchanges may develop will depend on empirical evidence on their structures and how they have been evolving over recent years. If we can see that there are strong economies of scale, for example, then we can expect that the larger stock exchanges will either drive the smaller out of business as barriers between them fall or that the smaller exchanges will merge so that they can compete successfully with their larger counterparts. Similarly we might expect that if there is a wide range of efficiency among exchanges that persists over time despite the reduction in barriers then it will be possible for a variety of exchanges to remain in business as other sources of competitive advantage clearly exist. In this and the subsequent chapter we explore the efficiency of stock exchanges, considering both their cost and revenue structures. We employ two main approaches: stochastic frontier analysis, which assumes that it is possible to parameterise the productive behaviour in the industry and data envelopment which is nonparametric. They each have their disadvantages.

The Payment System: Structure, Efficiency, Innovation and Regulation

It is easy to under-estimate the importance of the payment system and its contribution to the economy because it is largely out of sight. In some countries the costs of the payment system can amount to 3 per cent of GDP (Humphrey et al., 1997, p. 33). The costs of making payments can differ across countries by an order of ten, which could have a major impact on the development of the financial system and the ability to respond rapidly to new challenges and opportunities. This is particularly true for the exploitation of cross-border transactions in the EU. These issues could readily merit a book on their own. However, these aspects of financial ‘plumbing’ tend to be regarded as dull compared with banking and monetary policy. In this chapter, after a short introduction summarising the nature of the payment system and its structure, we consider just three main issues that affect the likely future development of the system: its efficiency in various countries round the world and the scope for improvement by moving to best practice; the nature of innovation in the industry and the potential for new more efficient systems both within and between countries; the role of regulators in shaping the future.

Securities Settlement Systems

In the chapter on payment systems, the issue of settlement – the final completion of the transaction to the satisfaction of the parties concerned – was largely deferred, because it is a much more substantive issue in the context of securities transactions. In the case of unidirectional payments, only one transaction has to be completed. However, in the case of securities, the security has to be ‘delivered’ to the purchaser in return for the payment.1 This creates two complications, first the matching of the two legs of the transaction and second that an additional system is required that holds and allocates titles to the securities. The first complication also exists where one payment is made in return for another as for example in currency transactions. The key issue here, however, is that several further layers are required in the transaction process.

E-Money: An Addendum

An area where forecasts made 25 years ago, before European financial integration was firmly on the agenda, are rather surprisingly astray, is e-money. With the rapidly rising use of credit cards at the time and the replacement of paper-based giro by ATMs, in Finland at least (see Chapter 2 on payments), one would have expected that notes and coins would be steadily replaced by electronic cards (purses – see Box for a definition) for low value transactions.1 Trial schemes were already being undertaken and the technology for reliable transactions exists and is in use. As it is, although notes and coins in circulation have fallen substantially in most countries compared to nominal income, this is more a result of the rise in the use of credit and debit cards for larger value transactions and the development of secure interest bearing highly liquid alternatives for cash balances.