Bank based versus market-based financing. Implications for systemic risk

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. The findings indicate that bank-based financial structures are associated with higher systemic risk than market-based financial structures. In relatively bank-based financial structures, bank financing is found to increase systemic risk while market financing decreases systemic risk. By contrast, in relatively market-based financial structures, bank and market financing do not impact systemic risk. Together, the results signal that market-based financial structures are more resilient to systemic risk.
 
Keywords: financial structure, systemic risk, bank financing, market financing.
JEL classifications: E44, G10, G21, O16.
 
Funding: This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.

 

Working paper no. 577