Funding by Markets or from Deposits: Does Financial System Architecture Matter?

Abstract

Does countries’ financial system architecture affect bank deposits funding? This paper examines this relationship by studying the effects of financial markets development on bank deposits in a cross- country setting. Our empirical results show that investors in developed and developing economies use financial markets differently. Therefore, the effects of financial markets on bank deposits also vary in these two types of economies. For instance, in financially developed economies, high financial integration amongst the banking system, financial markets and other financial institutions creates a favourable environment for the growth of the financial system by increasing bank deposits. In contrast, in developing countries, due to fragmentation of the financial system, financial markets and the banking sector compete against each other for deposits. Our results remain unchanged in response to number of robustness tests.

Keywords: Bank deposits Financial development Financial markets Banking system