Abstract

http://ssrn.com/abstract=879288
 
 

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Financial System Architecture and the Co-Evolution of Banks and Capital Markets


Fenghua Song


Pennsylvania State University - Smeal College of Business

Anjan V. Thakor


Washington University, Saint Louis - John M. Olin School of Business; European Corporate Governance Institute (ECGI)

February 19, 2009

Third Singapore International Conference on Finance 2009

Abstract:     
We study how financial system architecture evolves through the development of banks and financial markets. The predominant existing view is that banks and markets compete, which often contradicts actual patterns of development. We show that banks and markets exhibit three forms of interaction: they compete, they complement each other, and they co-evolve. Co-evolution is generated by two elements missing in previous analyses of financial system architecture: securitization and bank equity capital. As banks evolve via improvements in credit screening, they securitize higher-quality credits in the capital market. This encourages greater investor participation and spurs capital market evolution. And, if capital market evolution is spurred by exogenous shocks that cause more investors to participate, banks find it cheaper to raise equity capital to satisfy endogenously-arising risk-sensitive capital requirements. Banks thus serve previously-unserved high-risk borrowers, stimulating bank evolution. Numerous additional results are drawn out.

Number of Pages in PDF File: 40

Keywords: Financial System Architecture, Bank Evolution, Capital Market Evolution

JEL Classification: G10, G21

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Date posted: January 30, 2006 ; Last revised: July 22, 2009

Suggested Citation

Song, Fenghua and Thakor, Anjan V., Financial System Architecture and the Co-Evolution of Banks and Capital Markets (February 19, 2009). Third Singapore International Conference on Finance 2009. Available at SSRN: http://ssrn.com/abstract=879288 or http://dx.doi.org/10.2139/ssrn.879288

Contact Information

Fenghua Song
Pennsylvania State University - Smeal College of Business ( email )
University Park, PA 16802
United States
814.863.4905 (Phone)
814.865.3362 (Fax)
HOME PAGE: http://www.personal.psu.edu/fxs16
Anjan V. Thakor (Contact Author)
Washington University, Saint Louis - John M. Olin School of Business ( email )
One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
European Corporate Governance Institute (ECGI) ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
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