Bank Based vs Market Based Financial System: A Comparative Study

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.

Running Head: FINANCIAL SYSTEM 0
Financial System

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.
Advantages Disadvantages
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
Bank usually highlights the role in the
positive manner by helping the customer
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
of the corporation managers (Beck and
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.
Every time banks have to pass the new
policies and the procedures to deal with the
means of the credit and eventually results in
disturbing the risk projects (Wang, et al
2017)
Under this system the major benefit is to the
companies in the long run as they are able to
get the funding from the banks for the
purpose of the future expansion (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.
Advantages Disadvantages
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.
In case of the market based system the
relationship with the client is not for the
longer tenure. Rather it gets finished the
moment the project is over (Lehmann-
Hasemeyer and Streb, 2016).
Markets tend to invest in that venture which
makes the high or efficient and young
projects. In case of the market model the
scenario is all together opposite as it gives
the more funding to the young and the
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
the economy and the countries are
developing radically the market based system
Under the case of the market system there
may be the lack of goods and services and the
production may also lead to the negative

Running Head: FINANCIAL SYSTEM
literally helps the organisations and firms to
choose their own path and acts as the
supporter.
externalities.
Market based model encourages the major
principles of the democratic economics
which can damage the market mechanisms
and therefore ultimately leads to the
destruction of the corporate management
(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.
In Globalisation 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 market‐based 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 Catalão, J.P., (2017) The values of
market-based demand response on improving power system reliability under extreme
circumstances. Applied energy, 193, pp.220-231.