Bank-Based or Market-Based Financial Systems: Which is Better?

For over a century, economists and policy makers have debated the relative merits of bank-based versus market-based financial systems. Recent research, however, argues that classifying countries as bank-based or market is not a very fruitful way to distinguish financial systems. This paper represents the first broad, cross-country examination of which view of financial structure is more consistent with the data. The results indicate that although overall financial development is robustly linked with economic growth, there is no support for either the bank-based or market-based view.http://deepblue.lib.umich.edu/bitstream/2027.42/39826/3/wp442.pd

Law, Endowments, and Property Rights

While scholars have hypothesized about the sources of variation in property rights for over 2500 years, it is only very recently that researchers have begun to test these theories empirically. This paper reviews both the theory and empirical evidence supporting and refuting the law and endowment views of property rights. The law view holds that historically determined differences in national legal traditions continue to shape cross-country differences in property rights. The endowment view argues that during European colonization, differences in climate, crops, the indigenous population, and the disease environment influenced long-run property rights.

Bank-Based or Market-Based Financial Systems: Which is Better?

For over a century, economists and policy makers have debated the relative merits of bank-based versus market-based financial systems. Recent research, however, argues that classifying countries as bank-based or market is not a very fruitful way to distinguish financial systems. This paper represents the first broad, cross-country examination of which view of financial structure is more consistent with the data. The results indicate that although overall financial development is robustly linked with economic growth, there is no support for either the bank-based or market-based view.

Financial structures and economic development

The author constructs a model that captures the two-way nature of the relationship between financial and economic development - and allows societies at different levels of economic development and with different policies to choose different financial services. In this model, various types of financial contracts and institutions arise in response to the economic environment. Incentives for financial structures to emerge are generated by liquidity and productivity risk, the costs of gathering information and mobilizing resources, and the costs of financial transactions. The emergence and development of financial arrangements in response to the economic environment can alter investment decisions and per capita growth rates - while the level of per capita income helps determine the types of financial services a particular society chooses to develop and use. The author not only reconciles more empirical regularities than past theoretical studies have done, but highlights the role of public policies on financial activities. Policy has important implications for the rate of economic growth, the level of financial development, and the types of institutions providing financial services. The model also predicts that per capita growth rates should be related to the types of financial services provided by the financial sector. Thus, the most common empirical measure of financial development may not appropriately capture fundamental features of financial development.Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,Financial Intermediation,Governance Indicators

More on finance and growth: more finance, more growth?

Finance ; Economic development

Denying Foreign Bank Entry: Implications For Bank Interest Margins

This paper examines the impact of restricting foreign bank entry on bank net interest margins while controlling for (a) impediments to domestic bank entry, (b) the degree of foreign bank ownership of the domestic banking industry, (c) an array of bank-specific characteristics, (c) banking sectorconcentration, and (d) various country traits. Using data on almost 1200 banks across 47 countries, the results suggest that restricting foreign bank entry boosts bank net interest margins. Also, restricting foreign bank entry is special since restricting domestic bank entry does not help explainbank margins and the degree of foreign bank ownership also enters insignificantly.

Stock markets, growth, and policy

This paper shows how stock markets can accelerate growth and how policy can affect that growth either directly (by altering investment incentives) or indirectly (by changing the incentives underlying the creation of financial contracts). To help explain the role of financial markets in economic development, an endogenous growth model in which a stock market emerges to allocate risk was constructed. The model explores how the stock market alters investment incentives in ways that change steady-state growth rates. This paper demonstrates that stock markets can accelerate growth by: (a) facilitating the ability to trade ownership of firms without disrupting the productive processes occurring within firms; and (b) allowing agents to diversify portfolios across firms.Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,Financial Intermediation,Economic Growth

Bank-Based or Market-Based Financial Systems: Which is Better?

For over a century, economists and policy makers have debated the relative merits of bank-based versus market-based financial systems. Recent research, however, argues that classifying countries as bank-based or market is not a very fruitful way to distinguish financial systems. This paper represents the first broad, cross-country examination of which view of financial structure is more consistent with the data. The results indicate that although overall financial development is robustly linked with economic growth, there is no support for either the bank-based or market-based view.Banking and Finance, Banks, Stock Markets, Law, Economic Growth

Napoleon, Bourses, and Growth in Latin America

The value of equity market transactions in emerging economies soared from about 2 percent of the world total in 1986 to 12 percent in 1996. This boom was accompanied by an explosion of international capital flows, especially flows into developing country stock markets. Moreover, while equity flows were a negligible part of capital flows to emerging markets a decade ago, equity flows now represent about 20 percent of private capital flows to developing nations.

New firm formation and industry growth - does having a market- or bank-based system matter?

The authors find no evidence for the superiority of either market-based or bank-based financial systems for industries dependent on external financing. But they find overwhelming evidence that industries heavily dependent on external finance grow faster in economies with higher levels of financial development, and with better legal protection for outside investors - including strong creditor and shareholder rights and strong contract enforcement mechanisms. Financial development also stimulates the establishment of new firms, which is consistent with the Schumpeterian view of creative destruction. Financial development matters. That the financial system is bank-based on market-based offers little additional information.Fiscal&Monetary Policy,Payment Systems&Infrastructure,Banks&Banking Reform,Economic Theory&Research,Decentralization,Financial Economics,Economic Theory&Research,Achieving Shared Growth,Banks&Banking Reform,Governance Indicators