Abstract
The increasingly competitive environment poses challenges to bankers. This paper emphasizes relationship banking as a prime source of the banks» comparative advantage. The proliferation of transaction-oriented banking (trading and financial market activities) does, however, seriously challenge relationship banking. We identify two key dimensions. First, competition from financial markets destabilizes (traditional) durable relationships. We argue that, contrary to what many believe, banks may optimally respond by increasing relationship-specific investments. Second, transaction-oriented activities increasingly become an integral part of banking institutions. In the context of the Barings debacle we illustrate how transaction-oriented banking may undermine the banks» competitive edge in relationship banking. G20, G21.
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