Bank Based vs Market Based Financial System: A Comparative Study
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This article compares the advantages and disadvantages of bank based and market based financial systems. It also examines the financial structure of countries and provides a personal response on the need for a hybrid system.
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Running Head: FINANCIAL SYSTEM0 Financial System
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Running Head: FINANCIAL SYSTEM Contents Abstract......................................................................................................................................2 Introduction................................................................................................................................2 Bank Based System....................................................................................................................2 Market Based System.................................................................................................................3 Cross Country Examination and Personal Response.................................................................4 Conclusion..................................................................................................................................5 References..................................................................................................................................6
Running Head: FINANCIAL SYSTEM Abstract In this modern world the economists have debated mostly about the system that has been instilled in many countries. These systems are categorised into two major categories namely the bank based financial system and the market based financial system. This debate majorly focuses on the four countries Germany, Japan, United States and England. The former ones are under the bank based system and the later ones are under the market based systems. Introduction Financial structure helps in the mobilisation and the allocation of the capital in the variety of the manners. Under the bank based financial structure mostly the financial institutions are the part of it and assists in the financial intermediation of the balance sheet. The main motive and the purpose of these institutions are to bear the risk and establish the relationships with the client (Clearwater, 2016). On the contrary in case of the market based financial system the helps in channelizing the savings to the borrowers directly with the assistance of the market. Under the market based financial system the forms of the finance such as the equity and the debt are priced, distributed and traded(Hackethal, Schmidt and Tyrell, 2015). Bank Based System In the process of the economic development the financial systems play a major role in maintaining the financial performance of the country. Moreover it helps in reviving the old model of the system and converts it into more digitalised form. AdvantagesDisadvantages Under the bank based financial system the bank to client relationship is established for a longer duration and hence it is a beneficial point from the point of view of the customers as well Bank models are the less oriented models in comparison to the market based models Bankusuallyhighlightstheroleinthe positivemannerbyhelpingthecustomer choose the best investment proposals and in The bank based system is not efficient In pooling the resources and advancing them to the relevant projects simultaneously.
Running Head: FINANCIAL SYSTEM controlling the risks emerging from the side ofthecorporationmanagers(Beckand Levine, 2012). One of the most prominent advantages of this system is that banks help in reduction of the expenditures which are associated with the control of the firms and the activities of the managers. Everytimebankshavetopassthenew policies and the procedures to deal with the means of the credit and eventually results in disturbingtheriskprojects(Wang,etal 2017) Under this system the major benefit is to the companies in the long run as they are able to getthefundingfromthebanksforthe purposeofthefutureexpansion(Sable, 2015). Lastly the banks are not modern and failed to support the young companies as it gives the fewer amounts of funds to the companies. It is the slowdown process and needs to be changed with the changes in the technology. Market Based System Market Based system on the other hand is also surrounded by the certain advantages as well as the disadvantages which have been showcased below. AdvantagesDisadvantages Bonds market plays a vital role in the growth of the economy of the country. It shows the availability and the prefer ability of the binds market. Incaseofthemarketbasedsystemthe relationship with the client is not for the longertenure.Ratheritgetsfinishedthe momenttheprojectisover(Lehmann- Hasemeyer and Streb, 2016). Markets tend to invest in that venture which makesthehighorefficientandyoung projects. In case of the market model the scenario is all together opposite as it gives themorefundingtotheyoungandthe potential ventures (Amoore, 2018). Market model works only for those who can survive on the basis of their strong goodwill and the wealth. So it can be said that this model works only for the upper classes of the society. Due to the high level of the competition in theeconomyandthecountriesare developing radically the market based system Under the case of the market system there may be the lack of goods and services and the productionmayalsoleadtothenegative
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Running Head: FINANCIAL SYSTEM literally helps the organisations and firms to choosetheirownpathandactsasthe supporter. externalities. Market based model encourages the major principlesofthedemocraticeconomics which can damage the market mechanisms andthereforeultimatelyleadstothe destructionofthecorporatemanagement (Leonida and Muzzupappa, 2018). Free market economy also creates the gap between the rich and the poor. This system is a one sided system and hence it is prevalent only in few countries with the solid economy. Cross Country Examination and Personal Response To analyse the financial structure of the companies the companies are classified into the bank based and the market based system. A country whose conglomerate ratio is below the mean is classified as the market based country. Countries with the Common law Tradition and having the shareholders rights and surviving under the low level of corruption fall under the category of the market based. Whereas the banks financial institutions and the credit raising firms and the organisations are under the bank based financial system. Countries which are under bank based system are Sweden, Hong Kong, Singapore, Malaysia whereas Mexico, Turkey, Brazil fall under the market based system as the banks are underdeveloped in these countries (Lehmann-Hasemeyer and Streb, 2016). After analysing the advantages and the disadvantages of both the systems in my personal view a balance of both the system can lead to the development of the economy in terms of the price of the commodities and the financial assistance to the companies. Moreover the banks provide the alignment between the funds and the client and the market based system provides the platform to perform this method. So the combination of both the systems is necessary in country. However, there are other certain factors which will rule the acceptance or rejection of a particular system according to the needs of the country.
Running Head: FINANCIAL SYSTEM Conclusion Form the theoretical point of view the two options are totally different from each other, but from the practical point of view both the systems fill the gaps of each other and hence a hybrid system is an efficient one. Therefore looking at the financial across the countries the pattern is transparent and the financial sector development is greater.
Running Head: FINANCIAL SYSTEM References Amoore, L., (2018) Producing flexi-corporatism: The restructuring of work in Germany. InGlobalisation contested. Manchester University Press. Beck, T. and Levine, R., (2012) Industry growth and capital allocation:: does having a market-or bank-based system matter?.Journal of financial economics,64(2), pp.147-180. Clearwater, S.H., (2016)Market-based control: A paradigm for distributed resource allocation. World Scientific. Hackethal, A., Schmidt, R.H. and Tyrell, M., (2015) Banks and German Corporate Governance: on the way to a capital marketābased system?.Corporate Governance: An International Review,13(3), pp.397-407. Lehmann-Hasemeyer, S. and Streb, J., (2016) The Berlin Stock Exchange in Imperial Germany: A Market for New Technology?.American economic review,106(11), pp.3558-76. Leonida, L. and Muzzupappa, E., (2018) Do Basel Accords influence competition in the banking industry? A comparative analysis of Germany and the UK.Journal of Banking Regulation,19(1), pp.64-72. Sable, D.P., (2015) Bank based credit and market based credit in India: A study of pre and post liberalization.The Business & Management Review,5(4), p.9. Wang, F., Xu, H., Xu, T., Li, K., Shafie-Khah, M. and CatalĆ£o, J.P., (2017) The values of market-based demand response on improving power system reliability under extreme circumstances.Applied energy,193, pp.220-231.