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constrained for finance. Still, when a bank is locked in a firm, it is generally more likely to support it in times of trouble. Indeed the attitude of Japanese and German firms towards firms in danger of default is supposed to be much more supportive, though again the extent of the different behaviour of these countries with the UK and the US is controversial. A potential problem with locking in is that it has a tendency towards monopolistic situations both in the financial and the industrial sectors. When a firm is locked in with a bank, this means that it will not be available to search the market to find the cheapest source of finance. This lack of competition is likely to increase costs and inefficiency within the banking sector. Oligopolistic influences may be exercised over the industrial sector as well, since when banks are “locked” in one (or more) firms in an industry, they would be unwilling to fund new entrants. Other problems include that as the banks take some of the risks from the companies, we may have over-insurance resulting in managerial slack or overly risky behaviour. Furthermore, the arrangements which are likely to result from such intimate relationships between firms and banks are likely to be excessively secretive -as is often the case in Germany- leading to unaccountability and perhaps corruption as in Japan. The extent of involvement of the banks on the management of firms -which is clearly related to the extent of “locking in” – is also likely to influence credit and resource allocation. One may argue that the more information the banks have about the firm, the more likely they are to make the “correct” decisions on which projects and firms o finance and on what terms. On the other hand, it is argued that it would be better is this knowledge were widely available since many agents are more likely to end up with a better outcome. The conclusion to such a debate would be largely dependent on our opinion about the Efficient Markets Hypothesis, in other words the ability of a decentralised, competitive system to allocate funds and determine asset prices, through the stock and bond markets. However, the proportion of funds drawn from the stock market is surprisingly low so, indicating that perhaps its “excessive” volatility and, perhaps its short-termism does not make it a popular medium of finance for most firms. It is perhaps strange to notice, however, that often much of the volatility and “irrationality” of these markets is in fact attributed to these financial institutions which are here claimed to provide a more long-term and sober approach to industrial funding. The second issue we have to examine is that of corporate control. This issue has arised because of the separation of ownership from control as share ownership has been dispersed and hence the control of owners over their company is diminished. The significance of this separation is highly controversial with some arguing that this has altered the whole nature of capitalism as managers are socially conscious and less concerned with profit maximisation, while others point out that there has been little evidence of a slackening of the profit motive. In any case, most recognise that managers -and by extension all firm employees- are likely to have other objectives to solely profit maximisation – the most frequently proposed are sales maximisation and slackening of work effort. Therefore, a high degree of bank involvement and control over corporations is often thought to prevent the “managerial thesis” from being realised. Once again, there is considerable debate regarding the extent and effectiveness of financial control in the non-anglosaxon economies. Indeed a number of corporate troubles in Germany has indicated that financial control may well be overrated. There are many possible ways for financial institutions to exercise control or influence over firms. One possible way is to own stocks and exercise its influence through shareholders’ voting. This is unlikely to be very effective, though as rarely questions of great strategical importance are put to the vote while in most cases banks do not own a controlling proportion of shares. It has also been proposed that banks exercise influence by threatening to sell their shares but this is unlikely to be of major importance as the banks would also lose if they sold their shares quickly. Representation on the board of the company is another possible way but again in most cases, these boards are largely ceremonial and the bankers themselves often seem not to give them much attention. Thus the most common way for banks to exert influence is in indirectly consulting the managers, based on the power that they have from providing a large part of the firm’s finance, irrespective of whether that is in the form of shares or bank loans. It should be noted here that the importance of and the need for such financial control is significant only when the market fails to do that by itself. Those who again believe in the EMH, would see takeovers as an effective way of keeping the managers in check. There are numerous problems with takeovers, however, due to imperfect and asymmetric information and short-termism . Another question that arises is that if such close relations between firms and banks are thus mutually beneficial, why don’t all banks in all countries do the same. We also have to examine whether the interests of the financial institutions are identical with those of the shareholders of the non-financial firms. In a sense their interests differ since the owners of the firms want to maximise profits while banks want to maintain solvency. In the long run, however, the best way to guarantee solvency is to maximise profits so, though banks may be more cautious than perhaps required for short-run profit maximisation, there will probably be no important conflict of interest in the long-run. Nevertheless, problems may arise when banks