Market-Based Finance: Its Contributions and Emerging Issues

62 Pages Posted: 9 Mar 2017

See all articles by Matteo Aquilina

Matteo Aquilina

Financial Conduct Authority

Wladimir Kraus

Financial Conduct Authority

Date Written: May 5, 2016


The paper has three broad objectives:

- To better understand the factors that have transformed the relatively simple traditional banking model into one that is increasingly global and market-based.

- To develop an analytical framework to help us appreciate market-based finance’s (MBF) contribution to consumer welfare and identify its potential risks.

- To gather information from various sources on recent developments and discuss their significance for the FCA as a securities markets and conduct regulator.

The paper concludes that:

Market-based finance (MBF) is a system of financial services provision that exploits new ideas and technology.

- MBF has grown in response to advances in financial engineering and the globalisation of funding and capital markets, enhancing efficiency through specialisation, giving it comparative advantages over the traditional (bank-based) model of finance. Specifically, it has achieved diversification of the types of funding available to loan-making institutions, geographical diversification of the investor base, and has contributed to the development of new products and services for risk distribution and management.

- Regulatory arbitrage is not a major contributor to the growth of MBF, though it did lead to the emergence of a number of entities and activities that played a role in the development of the financial crisis.

- The MBF ecosystem is still evolving, so new products and services which are currently not part of it can, over time, move inside the MBF perimeter if they become sufficiently large and interconnected.

Market-based finance has many benefits…

- It can provide a ‘spare tyre’ for the economy in cases when traditional banks are unwilling or unable to lend, thereby reducing the impact of economic shocks.

- It provides a competitive constraint on traditional banking by making alternative forms of finance available to firms and investors, thereby improving the efficiency of the system.

- It provides access to larger markets for those products that prove successful in smaller niches because it can draw on a diverse pool of investors.

…but there are some risks which should not be overlooked.

- The system is complex, still not very well understood and can at times be unstable. This is particularly true for some areas in which regulators have not yet gained access to data to assess the risks.

- For some products, unsolved market failures are present.

The risks and potential market failures, including those that may lead to systemic instability, illustrate that regulatory authorities need better data to assess whether policy intervention is warranted.

Keywords: shadow banking, money view

JEL Classification: B26, E42, E44, G18, G23, G28

Suggested Citation

Aquilina, Matteo and Kraus, Wladimir, Market-Based Finance: Its Contributions and Emerging Issues (May 5, 2016). FCA Occasional Paper No. 18. Available at SSRN:

Matteo Aquilina (Contact Author)

Financial Conduct Authority ( email )

25 The North Colonnade
Canary Wharf
London, E14 5HS
United Kingdom

Wladimir Kraus

Financial Conduct Authority ( email )

25 The North Colonnade
Canary Wharf
London, E14 5HS
United Kingdom

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