The paper investigates the importance of distinguishing between the two types of financial structure (bank-based and market-based). Its major goal is to examine the effect of financial structure on developed countries during the period following the 2008-2009 financial crisis. For achieving this aim, a substantial bulk of literature was analyzed to trace the difference between the existing approaches to the issue. The study hypothesizes that financial structure had a profound effect on developed countries during financial crises. To estimate its effect on the output, the study specifies a linear regression model using ordinary least squares (OLS) estimators.
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It defines the dependent variable, gross domestic product per capita, to measure the economic output. The sample is a panel of 50 developed countries observed in the period from 2006 to 2016. For obtaining data on gross domestic product per capita and its growth rate, World Bank’s ‘DataBank’ database was accessed. The results of the analysis proved that countries with market-based structures recovered quicker than countries with bank-based structures and were more likely to return to pre-crisis output levels than countries with bank-based financial structures. This allowed concluding that the existing distinction is highly significant for developed countries.
Financial Structure refers to capital allocation mechanisms accepted in this or that economic system. There are two predominant types of financial structure: bank-based and market-based. Despite the fact that a lot of scholars investigated each type, there is still no agreement on the necessity of the distinction. Neither is it clear, which kind of structure is more effective in terms of promoting long-term economic improvement.
While in the 19th century, there were a lot of economists who believed that banks cope better with corporate control, savings mobilization, and identification of investments, many contemporary scholars argue that markets are more advantageous in their system of risk management and capital allocation (Levine 399). Moreover, services provided by market-based systems are believed to be more significant for the economy than those provided by bank-based systems. In the unstable global economic environment, it is highly important to identify which system is less prone to crises if there is indeed any distinction between them (Čihák and Demirgüç-Kunt R25).
Another aspect of interest that will be developed in the present paper is the correspondence between the level of economic development of the country and the financial structure that would be optimal for its economic growth. As countries become richer, both stock markets and financial intermediaries are transferred to a new stage of development. Yet, in more advanced states, markets are more efficient and active than the banking system.
In order to use the market-based financial structure for the common benefit, the country must have strong protection of stakeholder rights, a common law tradition, low corruption levels, and high standards of accounting. On the contrary, states with a French civil law tradition, high inflation rates, restricted banking systems, and low standards of accounting cannot rely on the market-based financial structure (Nyasha and Odhiambo 241). At the same time, excessive reliance on banks may aggravate the situation.
In order to find a solution to the enumerated controversies, further investigation of the two types of financial structure is required to assess their relative merits, thereby providing economists with frameworks to design appropriate reform strategies, especially during the time of financial crises.
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The goal of this study is therefore to produce findings that make a meaningful contribution to the ongoing discussion of financial structure.
Čihák, Martin, and Asli Demirgüç-Kunt. “Financial Structure and Incentives.” National Institute Economic Review, vol. 221, no. 1, 2012, pp. R23-R30.
Levine, Ross. “Bank-Based or Market-Based Financial Systems: Which Is Better?” Journal of Financial Intermediation, vol. 11, no. 4, 2002, pp. 398-428.
Nyasha, Sheilla, and Nicolas M. Odhiambo. “Economic Growth and Market-Based Financial Systems: A Review.” Studies in Economics and Finance, vol. 32, no. 2, 2015, pp. 235-255.