Banks, financial markets, and social welfare

Proceedings of ICRES 2024-- International Conference on Research in Education and Science, 2024

Throughout the history of the origination and development of the economy, financial intermediation has served to reduce transaction costs, which has had a stimulating effect on the economic system. On the other hand, financial intermediation at certain stages, replacing the real sector of the economy, could cause economic crises, unjustifiably inflating the money supply. The period after World War II was a period of prosperity and development of the economies of Western Europe. The struggle and unity of opposites, which manifests itself in the synergy of capitalism and social justice, leads to the formation of a new society. All the difficulties of this period undoubtedly affected the well-being of the population. In such difficult conditions, financial intermediation could play an important role in developing the economic potential of Western European countries. Was this really the case? The article makes an attempt to find an answer to this particular question. The purpose of this study: - to determine the impact of the financial intermediation institutions on the well-being of the population in Western European countries. We use the methodology of chrono-discrete monogeographic comparative analysis proposed by Demichev (2019) for legal institutions.

International Journal of Business, 1998

After a review of factors such as technology and the related policy toward financial liberalization that has affected financial institutions worldwide, this paper focuses on changes in Continental Europe. We identify and review three driving forces: (a) European integration, (b) the factors that cause a growth of securities markets, and (c) financial innovation. The paper arrives at the conclusion that there will be significant changes in the European financial system in terms of the growth of securities markets but that this growth will center on bank-affiliated institutions who will strengthen their position within national markets. In contrast, there will be relatively little impact via cross-border mergers and acquisitions in the banking sector. Finally, the paper suggests some implications for corporate governance, which will not change unless government policy makes the system of financial intermediation more contestable by outsiders and creates the preconditions for an effective corporate control. I. Introduction: Significance, Background, and Scope Technological developments and related pervasive effects on the regulatory environment have had a significant impact on financial products, and, especially, the financial institutions and delivery systems worldwide. While the U.S. financial system has already undergone dramatic changes since the early 1980s, and Japan is still in the talking stage, although seriously after announcing "Big Bang" liberalization in the Fall of 1997, in Continental Europe change has arrived with a vengeance in the 1990s. This survey paper focuses on the changing role of financial intermediation in Continental Europe, primarily by comparison to developments in the Anglo-Saxon world, i.e., the United States and, to some extent, the United Kingdom and Canada. Exploring this issue is particularly timely for essentially three reasons: first, and at the most basic level, since all economic agents are customers of financial institutions in one way or another, they are therefore directly affected by changes in the institutional structure of their financial service providers. Second, the changes in the industry deeply affect managers who must be concerned with strategic decision making under rapidly changing competitive conditions as the survival of their institutions and careers is at stake. Third, and most importantly, the discussion of the comparative performance of various economic systems has shown that financial systems have a pervasive effect on economic performance of various nations through their influence on economic performance via the efficiency of the investment process and corporate governance (for details, see Thakor [24]). Moreover, with the globalization of markets, financial systems do compete head-on, raising serious questions regarding the "best" system and whether and to what extent optimal institutional structures emerge (for details, see Prati and Schinasi [19]).

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The role of banks in the economy is justified in the mainstream economics and finance literature by their ability to reduce informational asymmetries and to innovate risk transformation instruments. The political economy literature on governance, on the other hand, sees an important institutional role for banks in disciplining firm managers and facilitate financing of long-term productive activities of firms. The current banking crisis, however, has raised serious questions about such efficiency-based arguments and has undermined the arguments about financial innovation as market-based mechanism to support productive activities. The literatures on financial intermediation and corporate governance focuse on the efficiency of financial institutions and markets but ignores the historical transformation in banking since the early 1980s during which the Western economies have become financialized. In the first section this paper will provide a comprehensive critical review of the mainstream banking literatures. The second section will argue, through a set of empirics, how banks have reinvented themselves in a financialized economy by radically changing their balance sheet structure and revenue sources. The third section will conclude.

Annals of Finance, 2008

Following Diamond (1997) and Fecht (2004) we use a model in which nancial market access of households restrains the eciency of the liquidity insurance that banks' deposit contracts provide to households that are subject to idiosyncratic liquidity shocks. But in contrast to these approaches we assume spacial monopolistic competition among banks. Since monopoly rents are assumed to bring about ineciencies, improved nancial market access that limits monopoly rents also entails a positive eect. But this benecial eect is only relevant if competition among banks does not suciently restrain monopoly rents already. Thus our results suggest that in the bank-dominated nancial system of Germany, in which banks intensely compete for households' deposits, improved nancial market access might reduce welfare because it only reduces risk sharing. In contrast, in the banking system of the U.S., with less competition for households' deposits, a high level of households' nancial market participation might be benecial.

European Journal of Business and Management, 2019

There is no simple answer to the question of why financial systems and firm financing vary from country to country. The most commonly used classification for the types of financial systems is the distinction of the bank-based and market-based financial system. In the studies conducted in economics and finance literature, it can be seen that these two systems cannot reveal an absolute superiority in terms of growth and prosperity in the countries. Our analysis state that in view of the future direction of the Turkish financial system, it may be thought that efforts to establish a "hybrid financial system" that can combine the bank-based financial system and the relatively superior aspects of the market-based financial system will be better.

Journal of Banking & Finance, 2011

Journal of Banking & Finance, 2007

This paper analyses the relationship between market power in the loan and deposit markets and efficiency in the EU-15 countries over 1993-2002. Results show the existence of a positive relationship between market power and cost X-efficiency, allowing rejection of the so-called quiet life hypothesis [Berger, A.N., Hannan, T.H., 1998. The efficiency cost of market power in the banking industry: A test of the 'quiet life' and related hypotheses. Review of Economics and Statistics 8 (3), 454-465]. The social welfare loss attributable to market power in 2002 represented 0.54% of the GDP of the EU-15. Results show that the welfare gains associated with a reduction of market power are greater than the loss of bank cost efficiency, showing the importance of economic policy measures aimed at removing the barriers to outside competition.

This essay reflects upon the relationship between the current theory of financial intermediation and real-world practice. Our critical analysis of this theory leads to several building blocks of a new theory of financial intermediation.

Journal of Financial Stability, 2024

Every financial crisis raises questions about how the banking market structure affects the real economy. Although low bank concentration may reduce markups and foster riskier behavior, concentrated banking systems appear more resilient to financial shocks. We use a nonlinear dynamic stochastic general equilibrium model with financial frictions to compare the transmissions of shocks under different competition and concentration configurations. The results reveal that oligopolistic competition amplifies the effects of the shocks relative to monopolistic competition. The transmission mechanism works through the markups, which are amplified when banking concentration is increased. The desirable banking market structure is determined according to financial stability and social welfare objectives. Moreover, we find that depending on policymakers' preferences, a banking concentration of five to eight banks balances social welfare and bank stability objectives in the United States.

This report on the German financial system is one of 15 studies of national financial systems undertaken as part of the research project Financialisation, Economy, Society and Sustainable Development (FESSUD). The report attempts to present a summary of the existing research and the most recent available data on the German financial system within in a framework that is broadly compatible with the studies undertaken in the other participating countries.

Journal of Monetary Economics, 2006

We study bank-based and market-based financial systems in an endogenous growth model. Lending to firms is fraught with moral hazard as owner-managers may reduce investment profitability to enjoy private benefits. Bank monitoring partially resolves the agency problem, while market-finance is more 'hands-off'. A bank-based or market-based system emerges from firm-financing choices. It is not possible to say unequivocally which of the two systems is better for growth. The growth rate depends, crucially, on the efficiency of financial and legal institutions. But a bank-based system outperforms a market-based one along other dimensions. Investment and per capita income are higher, and income inequality lower, under a bank-based system. Bank-based systems are more conducive for broad-based industrialization. A temporary income redistribution, under both financial systems, results in permanent improvement in per capita income as well as income distribution.

World Politics, 2013

The wide-ranging varieties of capitalism literature rests on a particular conception of banks and banking that, the authors argue, no longer reflects the reality of modern financial systems. They take advantage of the greater information regarding bank activities revealed by the financial crisis to consider the reality, across eight of the world's largest developed economies, of the financial power of banks to act as bulwarks against market forces. This article offers a market-based banking framework that transcends the bank-based/capital market–based dichotomy that dominates comparative political economy's consideration of financial systems and argues that future CPE research should focus on the activities of banks. By demonstrating how market-based banking increases market influences on the supply of credit, the authors highlight an underap-preciated source of financial market pressure on nonfinancial companies (NFCs) that can have a potential impact across the range of is...

2007

We propose a simple framework to explore how different market structures in the banking system affect credit allocation, and how deposits and number of entrepreneurs affect the equilibrium number of banks in the economy. We find that within the Marshallian aggregate surplus perspective, the number of entrants in the banking system is always larger than the socially optimal number of banks.

2011

We study versions of a general equilibrium banking model with moral hazard under either constant or increasing returns to scale of the intermediation technology used by banks to screen and/or monitor borrowers. If the intermediation technology exhibits increasing returns to scale, or it is relatively efficient, then perfect competition is optimal and supports the lowest feasible level of bank risk. Conversely, if the intermediation technology exhibits constant returns to scale, or is relatively inefficient, then imperfect competition and intermediate levels of bank risks are optimal. These results are empirically relevant and carry significant implications for financial policy.

This paper examines the historical origins of the bank-based financial systems in Germany and Japan and the market-based financial system in the US. It critically examines the timing of industrialization (TOI) thesis, i.e. the assertion that variation in the current structure of financial systems can be explained by differences in the timing of the take-off phase of industrialization. The first major claim I make is that TOI overstates both the significance of bank-based finance for the rapid industrialization of Germany and Japan and the extent to which the financial systems really were different. Second, I argue that TOI understates the importance of different patterns of state regulation, particularly starting in the 1930s, for explaining postwar differences in the financial systems. The third claim I make is that differences in financial regimes are dependent not only upon the narrow issue of financial regulation but also on the nature of the regulation of labor, including welfa...