Bank-Based and Market-Based Financial Systems: Cross-Country Comparisons

72 Pages Posted: 20 Apr 2016

See all articles by Asli Demirgüç-Kunt

Asli Demirgüç-Kunt

World Bank - Development Research Group; World Bank

Ross Levine

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER)

Date Written: July 1999

Abstract

Financial systems tend to be more market-based in higher income countries, where stock markets also become more active and efficient than banks.

Financial systems also tend to be more market-based, even after controlling for income, in countries with a common law tradition, strong protection of shareholder rights, good accounting standards, low levels of corruption, and no explicit deposit insurance.

What are the relative advantages and disadvantages of bank-based financial systems (as in Germany and Japan) and market-based financial systems (as in England and the United States). Does financial structure matter?

In bank-based systems banks play a leading role in mobilizing savings, allocating capital, overseeing the investment decisions of corporate managers, and providing risk management vehicles.

In market-based systems securities markets share center stage with banks in getting society's savings to firms, exerting corporate control, and easing risk management.

The unresolved debate about whether markets or bank-based intermediaries are more effective at providing financial services hampers the formation of sound policy advice.

Demirguc-Kunt and Levine use newly collected data on a cross-section of roughly 150 countries to illustrate how financial systems differ around the world. They (1) analyze how the size, activity, and efficiency of financial systems differ across different per capita income groups, (2) define different indicators of financial structure and identify different patterns as countries become richer, and (3) investigate legal, regulatory, and policy determinants of financial structure after controlling for per capita GDP.

A clear pattern emerges: - Banks, other financial intermediaries, and stock markets all grow and become more active and efficient as countries become richer. As income grows, the financial sector develops. - In higher income countries, stock markets become more active and efficient than banks. Thus, financial systems tend to be more market based. - Countries with a common law tradition, strong protection for shareholder rights, good accounting standards, low levels of corruption, and no explicit deposit insurance tend to be more market-based, even after controlling for income. - Countries with a French civil law tradition, poor accounting standards, heavily restricted banking systems, and high inflation generally tend to have underdeveloped financial systems, even after controlling for income.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to study the impact of financial structure on economic development.

Suggested Citation

Demirgüç-Kunt, Asli and Levine, Ross Eric, Bank-Based and Market-Based Financial Systems: Cross-Country Comparisons (July 1999). World Bank Policy Working Paper No. 2143. Available at SSRN: https://ssrn.com/abstract=569255

Asli Demirgüç-Kunt (Contact Author)

World Bank - Development Research Group ( email )

United States
202-473-7479 (Phone)
202-522-1155 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/ademirguckunt/

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Ross Eric Levine

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
4,394
Abstract Views
18,135
rank
1,990
PlumX Metrics