577 - Bank-based versus market-based financing: implications for systemic risk

DNB Working Papers
Date 11 December 2017
Against the background of the great financial crisis, this paper assesses the merits of bank-based versus market-based financing by exploring the relationship between financial structure and systemic risk. A fixed effects regression model is estimated over a panel of 22 OECD countries. The results show that bank-based financing generates systemic risk while market-based debt and especially market-based stock financing reduce systemic risk. A threshold regression model estimated over the same panel suggests that banks no longer contribute to systemic risk when there is little bank-based financing. In the case of relatively market-based financial structures, the influence of banks on systemic risk is low. The findings indicate that countries can increase their resilience to systemic risk by reducing the share of bank-based financing and increasing the share of market-based financing. 
Keywords: financial structure, systemic risk, bank-based financing, market-based financing.
JEL classifications: E44, G10, G21, O16.