##sidize between products unless one provides a large number of diverse services. cross - subsidization has led to a situation where customers have got some services, such as payment services, entirely free or by paying just a modest fee, whereas transaction deposits are paid a very low rate of interest. hence, customers pay for their payment services implicitly rather than explicitly, by accepting a deposit rate that is far below the risk - free return available elsewhere. one may wonder why this has come about. without going too deeply into the matter i just want to refer to a dissertation thesis by dr juha tarkka, advisor to the board in the bank of finland, according to which this cross subsidization may be a fully rational response to prevailing conditions for three different reasons ; the taxation treatment of “ free services ”, price discrimination between customers under imperfect competition, and customers'uncertainty of their service requirements. 1 this cross - subsidization may now become more difficult if interest rates remain low for a long period of time ; the difference between market rates and the rate paid to transaction accounts must be narrow if market rates are close to zero, implying that attracting deposits by offering free payment services would no longer be a profitable strategy. if this crosssubsidization is no longer possible, banks must adapt themselves to a new situation where they should find new ways to cover the costs of services given. thus, the old way of doing business – even in traditional retail banking – is changing. increasing competition is crucial for improving efficiency. today ’ s main theme is therefore of utmost importance for increasing productivity in retail banking. productivity improvement in banking has been substantial. in my country, finland, for instance, banks invested heavily in information technology in the 70 ’ s and 80 ’ s when the regulations of the time directed competition to service and quality competition. when a very severe banking crisis hit the finnish banking industry in the 90s, banks had to make good use of their technological capabilities. they more than halved the work force from about 55, 000 to about 25, 000 over a five - year period, while increasing banking activities and volumes. according to econometric estimations made at the bank of finland a couple of years ago by dr karlo kauko and dr leena morttinen, productivity improvement in finnish banking improved by 9 - 10 % a year over the decade 1995 - 2004. 2 hence, each bank had to be able to compete against rivals that are improving their cost efficiency

sector that hampers domestic lending – and channels domestic savings abroad. of course, in some commodity exporting countries, surpluses and official sector savings have been boosted by elevated commodity prices. i would also like to emphasize the significance of the domestic policy contexts in the major deficit and surplus countries. as i mentioned in the beginning, the solution to the issue of external imbalances seems relatively simple if considered in isolation : just reverse the existing divergent trends in saving and investment ratios between the countries involved. it is important, however, to recognize that the global imbalances also reflect cross - country differences in economic structures and real resources, which give rise to differing policy interests. the post - crisis outlook for the imbalances so what does the crisis imply for the evolution of the imbalances going forward? here i wish to make a few brief observations. on the one hand, the challenge of external rebalancing in the deficit countries has become closely intertwined with the internal rebalancing between public and private demand. whereas the low saving rates in major deficit economies previously reflected large - scale private sector borrowing, the rapid decline in private spending after the crisis replaced private deficits with sizeable public sector deficits. too much of global demand and economic activity is now dependent on the fiscal deficits in the developed world. therefore, the deficit countries here face a dual task : to rebalance the government budgets and, at the same time, to establish a growth - friendly economic environment that provides a sustainable foundation for the growth of private spending. in terms of policy, one priority here lies in measures to maintain the availability of credit to the private sector, for example through repair and reform of the financial sector. however, credit is not enough by itself. the growth of private demand must lie on a sustainable basis. in the deficit countries, future growth inevitably needs to rely increasingly more on net exports. this is a competitiveness question, but also a structural question. and this, of course, goes part and parcel with the objective of reducing the external imbalances. on the other hand, recent events clearly demonstrate how the current crisis has increased the international pressure on emerging market countries with surpluses. this was clearly apparent at the last round of g20 discussions, where foreign exchange issues were at the centre of the agenda. undoubtedly, the problem has not gone away and will be one of the hardest issues also in the upcoming meetings. however the exchange rate, the real exchange rate to be