Browsing by Author "Vesala, Jukka"

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  • Vesala, Jukka (1998)
    Suomen Pankin keskustelualoitteita 18/1998
    Sisällysluettelo: 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. Keywords: banking, delivery networks, differentiation, collusion
  • Niskanen, Mikko; Vesala, Jukka (1996)
    Euroopan talous- ja rahaliitto yhtenäistäisi osallistuvien maiden rahoitusmarkkinoita entisestään ja kiristäisi siten kilpailua.Nopeimmin EMU vaikuttaisi rahoituksen tukkumarkkinoilla.Maksu- ja selviysjärjestelmien ja kaupankäyntitapojen yhtenäisyttyä voitaisiin puhua yleiseurooppalaisista arvopaperimarkkinoista. Rahoituspalvelujen tarjoajista suurimpaan sopeutumispaineeseen joutuisivat pankit.
  • Huttunen, Juhani; Vesala, Jukka (1995)
    Bank of Finland. Bulletin 69 ; 11 ; November
  • Koskenkylä, Heikki; Vesala, Jukka (1994)
    Suomen Pankin keskustelualoitteita 16/1994
    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.
  • Snellman, Jussi; Vesala, Jukka (1999)
    Bank of Finland Research Discussion Papers 8/1999
    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. Key words: payments, electronification, learning curves
  • Vesala, Jukka (1992)
    Bank of Finland Research Discussion Papers 29/1992
    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.
  • Mayes, David; Vesala, Jukka (1998)
    Bank of Finland. Discussion papers 20/1998
    Ilmestynyt myös 2000 CPEE ; Current politics and economics of Europe 10 ; 1.
    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. Keywords: banking supervision, disclosure, crisis management
  • Koskenkylä, Heikki; Vesala, Jukka (1997)
  • Valori, Veli-Pekka; Vesala, Jukka (1998)
    Bank of Finland. Bulletin 72 ; 3 ; March
  • Vesala, Jukka (1993)
    Bank of Finland. Series D 77
    The aim of this study is to survey the competitive and structural effects of European finanGial integration on banking in the forthcoming European Economic Area, where legal impediments to free cross-border provision of banking services will be largely abolished by the legal measures adopted in the EC. The Single Banking Market came into being in the EC on 1 January 1993, and will be extended to inc1ude the EFTA countries when the EEA Agreement enters into force, with the exception of Swizerland, where the agreement has been rejected in a national referendum. A further aim is to comment on the potential industry-specific efficiency and welfare gains and thei! distribution across countries, which are contingent on the expected competitive and structural consequences of banking integration. These gains constitute the basic economic motive behind the Intemal Market Programme of the EC. Insurance firms and other non-bank financial institutions are exc1uded from the study.
  • Snellman, Jussi; Vesala, Jukka; Humphrey, David (2000)
    Suomen Pankin keskustelualoitteita 1/2000
    Ilmestynyt myös Journal of Financial Services Research 19 ; 2-3 ; 2001.
    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.
  • Koskenkylä, Heikki; Vesala, Jukka (1996)
    Pankkien liiketappio pieneni viime vuonna Suomessa merkittävästi. Se johtui etupäässä luottotappioiden vähentymisestä.Pankkien kannattavuuden arvioidaan paranevan edelleen kuluvana vuonna. Suomen pankkisektorin kannattavuus ja vakavaraisuus ovat kuitenkin edelleen varsin haavoittuvia.
  • Valori, Veli-Pekka; Vesala, Jukka (1998)
    MARKKA & TALOUS no 1
  • Vesala, Jukka (1998)
    Bank of Finland. Discussion papers 8/1998
    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
  • Vesala, Jukka (2000)
    Suomen Pankki. E 20
    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. Key words: banking competition, technological change, delivery networks, monetary policy efficiency, competition policy
  • Vesala, Jukka (1995)
    Suomen Pankki. E 1
    Sisällysluettelo: 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 Individual cross-section data 64 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 Direct and strategic effects 98 Characterization of strategic behaviour 101 4.2.3 Model of price setting duopolists - comparative statics 102 Linear demand and strategic complementarity 102 Equilibrium price effects 104 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 Demand for bank loans 134 Demand for deposit services 135 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
  • Koskenkylä, Heikki; Vesala, Jukka (1996)
    Bank of Finland. Bulletin 70 ; 6-7 ; June-July
  • Koskenkylä, Heikki; Vesala, Jukka (1997)
    Bank of Finland. Bulletin 71 ; 6-7 ; June-July
  • Vesala, Jukka (1994)
    Bank of Finland. Bulletin 68 ; 11 ; November