Does Economic Structure Determine Financial Structure?

Abstract

Differences in countries financial structure are prevailing despite the global converegence of the economies. In countries such as Germany or Spain the financial system is dominated by banks, whereares in the U.S. or the U.K. financial system capital markets is predominated. In our paper we investigate the relation between the structure of the real economy and country's financial system. We consider whether the development of the real economic structure determine the evolution of the financial system structure. Using both pooled FGLS regression and panel EC2SLS techniques we find that economies dominated by physical-asset-intensive firms tend to have a bank-based financial system. Conversely, countries with knowledge based industries and intangible-asset-intensive firms tend to have a market-based financial system. Our results suggests that financial structures develop and prevail in response to the financial needs of firms, hence to the characteristics of the real economy.