Some of the "old" ones suffer loss of their bread-and-butter business. The outcome in the longer term is unclear. It is conceivable that banks cease to exist as integrated multi-product businesses. They become instead product specialists in a rather fragmented landscape, finding it tough to earn more than commodity profits even in areas where, in the case of the longer established banks, they used to enjoy niche advantages. The other scenario emanates from the same starting point of intense competition. But in this case the new entrants do not have the resources to continue with their generous initial terms for long enough to secure a firm business foundation. The established banks reluctantly but necessarily take on the newcomers aggressively, utilising their financial strength and making extra efforts to build robust relationships across a broad range of services and to exploit the underlying inertia that customers may exhibit. In other words, they use the internet to consolidate their relationships and to see off the competition. Customers are persuaded that it's not worth sacrificing the relationship for the sake of a few basis points. Some customers may be lost, but some of these may anyway be ones which the banks can afford to say goodbye to. As a variant to this model, the banks may adopt different brands for their internet services, exploiting any opportunities available from product differentiation and market segmentation, but retaining the capacity from their standpoint to manage multiple relationships with any individual customer as one. One can envisage many other outcomes besides these examples.

At the end of the day the pattern will depend on efficiency and the laws of comparative advantage. From the official side, we in Hong Kong are anxious to provide an infrastructure and business environment on a level playing field within which such activities can flourish, but we are not capable of determining the outcome. The role of cross-border bank finance in economic development In the absence of an adequately developed financial sector, sound enough to enjoy the trust of the local community and offering sufficiently attractive products, it may prove difficult to channel domestic savings into domestic investment. This is a problem which confronts many less developed and emerging economies. The result is often that, despite a quite strong disposition of households to save, the preference is to exploit all means, legal or otherwise, to hold those savings offshore. In consequence, domestic enterprises and government may become more dependent than otherwise on attracting funds from abroad to fulfil their funding needs. This may have the salutary advantage of exposing the borrowers to the discipline of the international market place, but it may also saddle them  2  BIS Review 59/2001  with higher costs and currency risk. Moreover, historically, the lending institutions have not always possessed sufficient local knowledge to enable them to make sound credit judgements. This role of banks as providers of cross-border funding for development is the second topic on my list today. The subject is perhaps topical for not the happiest of reasons.