Structure Of Financial System Research Articles

Relationships Between Banks and Insurers Vis-á-Vis Globalisation Processes and Social Reforms in Poland

Relationships Between Banks and Insurers Vis-á-Vis Globalisation Processes and Social Reforms in Poland The aim of the article is an attempt to present tendencies and prospects of bank-insurance relationship development in Poland in the period of globalization and social insurance reforms. The evolution and financial system structure as well as the spheres of operation of the banking and insurance sectors, supported by examples are presented on the background of the current situation in Poland and European trends. The influence of social reforms as a factor determining creating banks-insurance companies structure (OFE market) is taken into consideration in the analysis.

INVESTOR PROTECTION AND FINANCIAL SYSTEM STRUCTURE

This paper presents the results of research in “law and finance” approach in the area of significance of investor protection for financial system structure (i.e. if this system is bank- or securities market based). Namely, the level of this protection, shaped by such characteristics of law as: legal tradition, regulations in corporate governance, accounting standards, and enforcement of law are main factors influencing the financial system architecture. However, these results are criticized. First, opponents prove that legal regulations are secondary for political factors. Second, there is also impaired importance of legal tradition, i.e. durability of advantage of one type over another and independence of its effectiveness from local circumstances.

The development and structure of financial systems

Firms raise external finance via monitored bank loans and non-monitored borrowing in a dynamic general equilibrium model. Access to credit and each type of financing depend on the wealth distribution due to moral hazard. We study the depth of credit markets (financial development) and conditions under which the financial system relies more on either type of external finance (financial structure). Initial inequality, investment size and institutional factors determine the level of financial development, while financial structure is shaped by the investment technology and legal and financial institutions. The model's predictions are consistent with historical and recent development experience.

Financial system structure and economic growth: Structure matters

This paper investigates how the structure of a financial system—whether it is bank or market-oriented—affects economic growth. In contrast to earlier research, which indicates that the financial system's structure is irrelevant for growth, I find that there is a nonlinear (contingent) relationship between growth and financial structure. Countries that have an inflexible judicial system grow faster when they have a more bank-oriented financial system.

Why Central Banks Should Not Burst Bubbles

Central banks should not be in the business of trying to prick asset price bubbles. Bubbles generally arise out of some combination of irrational exuberance, technological jumps, and financial deregulation (with more of the second in equity price bubbles and more of the third in real estate booms). Accordingly, the connection between monetary conditions and the rise of bubbles is rather tenuous, and anything short of inducing a recession by tightening credit conditions prohibitively is unlikely to stem their rise. Even if a central bank were willing to take that one-in-three or less shot at cutting off a bubble, the cost-benefit analysis hardly justifies such preemptive action. The macroeconomic harm from a bubble bursting is generally a function of the financial system's structure and stability - in modern economies with satisfactory bank supervision, the transmission of a negative shock from an asset price bust is relatively limited, as was seen in the United States in 2002. However, where financial fragility does exist, as in Japan in the 1990s, the costs of inducing a recession go up significantly, so the relative disadvantages of monetary preemption over letting the bubble run its course mount. In the end, there is no monetary substitute for financial stability, and no market substitute for monetary ease during severe credit crunch. These two realities imply that the central bank should not take asset prices directly into account in monetary policymaking but should be anything but laissez-faire in responding to sharp movements in inflation and output, even if asset price swings are their source.

Why Central Banks Should Not Burst Bubbles*

Central banks should not be in the business of trying to prick asset price bubbles. Bubbles generally arise out of some combination of irrational exuberance, technological jumps, and financial deregulation (with more of the second in equity price bubbles and more of the third in real estate booms). Accordingly, the connection between monetary conditions and the rise of bubbles is rather tenuous, and anything short of inducing a recession by tightening credit conditions prohibitively is unlikely to stem their rise. Even if a central bank were willing to take that one-in-three or less shot at cutting off a bubble, the cost-benefit analysis hardly justifies such preemptive action. The macroeconomic harm from a bubble bursting is generally a function of the financial system's structure and stability—in modern economies with satisfactory bank supervision, the transmission of a negative shock from an asset price bust is relatively limited, as was seen in the United States in 2002. However, where financial fragility does exist, as in Japan in the 1990s, the costs of inducing a recession go up significantly, so the relative disadvantages of monetary preemption over letting the bubble run its course mount. In the end, there is no monetary substitute for financial stability, and no market substitute for monetary ease during severe credit crunch. These two realities imply that the central bank should not take asset prices directly into account in monetary policymaking but should be anything but laissez-faire in responding to sharp movements in inflation and output, even if asset price swings are their source.(This abstract was borrowed from another version of this item.)

Does Economic Structure Determine Financial Structure?

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.

Financial Sector Regulation - Issues and Gaps

This paper addresses issues in financial sector regulation from two perspectives. First, it reports on the state of implementation of financial regulatory standards across banking, insurance, and securities sectors in a select group of Fund member countries. Second, it raises issues relating to the design of these three sector standards, arising from the implementation experience and the evolving structure of financial systems. In this regard, the paper identifies a few emerging regulatory risks and some cross-sectoral issues that may warrant further guidance by standard setters.

Financial System Structure and Economic Development: Structure Matters

This paper investigates how the structure of a financial system—whether it is bank or market oriented— affects economic growth. In contrast to earlier research, which indicates that the financial system’s structure is irrelevant for growth, I find that countries grow faster when they have flexible judicial system and more market-oriented financial systems.

North American monetary and financial integration: notes on the US perspective

These notes summarize from a US perspective the microeconomic and macroeconomic costs and benefits of North American monetary and financial integration. The analysis assumes substantial convergence in the structure of financial systems and supervisory and regulatory regimes toward the US model. The conclusion is that neither costs nor benefits are likely to be substantial, and the net, whatever its sign, is likely to be trivial. Thus, the case for much deeper integration is likely to turn on other considerations.

The Euro Area Financial System: Structure, Integration and Policy Initiatives

Four years after the introduction of the euro, this paper provides an overview of the current structure and integration of the euro area financial systems and related policy initiatives. We first compare the euro area financial structure with that of the United States and Japan. Using new and comprehensive financial account data, we also describe how the euro area financial structure evolved since 1995. We document the progress towards integration of the major euro area financial segments, namely money markets, bond markets, equity markets and banking. Finally, we discuss recent policy initiatives aimed at further improving European financial integration.

MIDDLE EAST & NORTH AFRICA OFFER KEY OPPORTUNITIES

Developing countries had been affected by the crisis started in the developed countries, characterized by lower growth, higher unemployment and poverty, and changes in inequality, but several channels had affected also emerging countries differently, depending on the extent to which they are vulnerable to particular channels. Major emerging economies from Central and Eastern Europe are post-communist countries that faced transition after adopting market-based economy. All former socialist countries were characterized by an early transition recession transformation result of the restructuring, loss of markets, tough competition from foreign products, best quality, or in other cases cheaper. As regards Romania's status in the context of transition, we may say that it bears the characteristics determined by the situation inherited from the centralized economy and the options of political forces after 1989. The starting point was unfavorable both from an economic perspective, but also social, economic inefficiency due to the existence of industrial projects and sometimes senseless economic, profound structural economic imbalances, sizing of industries and alarming social indicators. In first part, present paper wants to express the role of financial system structure during transition and crises, estimating the effects on a sample of five post-communist countries. We take into discussion data that reflects representative mutations and some restructuring in Central and Eastern European countries, such Bulgaria, Czech Republic, Hungary, Poland and Romania. For all countries we show some important changes of financial system during transition and construct an image matrix that illustrate important indicators of financial system structure and their adjustment. We use data based on Thorston Beck IMF Database (Beck T., WorldBank). In second part of the paper we show some major transmission channels of crisis and some possible effects on post-communist countries, described in economic literature. The analyze uses tables and graphical interpretation. In the last part of the paper we present some OLS estimators of the major factors identified as transmission channels using a dataset from EBRD databases.

The Design of Financial Systems: Towards a Synthesis of Function and Structure

This paper proposes a functional approach to designing and managing the financial systems of countries, regions, firms, households, and other entities. It is a synthesis of the neoclassical, neo-institutional, and behavioral perspectives. Neoclassical theory is an ideal driver to link science and global practice in finance because its prescriptions are robust across time and geopolitical borders. By itself, however, neoclassical theory provides little prescription or prediction of the institutional structure of financial systems that is, the specific kinds of financial intermediaries, markets, and regulatory bodies that will or should evolve in response to underlying changes in technology, politics, demographics, and cultural norms. The neoclassical model therefore offers important, but incomplete, guidance to decision makers seeking to understand and manage the process of institutional change. In accomplishing this task, the neo-institutional and behavioral perspectives can be very useful. In this proposed synthesis of the three approaches, functional and structural finance (FSF), institutional structure is endogenous. When particular transaction costs or behavioral patterns produce large departures from the predictions of the ideal frictionless' neoclassical equilibrium for a given institutional structure, new institutions tend to develop that partially offset the resulting inefficiencies. In the longer run, after institutional structures have had time to fully develop, the predictions of the neoclassical model will be approximately valid for asset prices and resource allocations. Through a series of examples, the paper sets out the reasoning behind the FSF synthesis and illustrates its application.

Economic, Political, and Legal Factors in Financial System Development: International Patterns in Historical Perspective

Financial systems are often described either as bank-based, universal, and relational or as market-based, specialized, and arms-length; and for many years academics and policymakers have debated the relative merits of these different types of systems. This paper inquires into the underlying causes of financial system structure and development. Older theories dictated that financial institutions developed in relationship to the economy’s level of development. Newer work has brought political and legal factors to the fore: hypothesizing specific relationships between banking structure and state centralization and between financial development and legal tradition. This study classifies countries by type of financial system, and in doing, indicates that few banking systems fit the extreme paradigms of universal-relationship or specialized arm’s length banking. On the other hand, despite several cases of temporary upheaval, and recent widespread movement toward conglomeration, banking system structure has remained remarkably stable over the last 100 to 150 years. Economic factors in the late nineteenth century provide relatively strong explanatory power for financial system development, market orientation, and banking structure at the eve of World War I and in the present day. Banking specialization and market orientation appear strongly associated with legal tradition, though it seems more likely that the three characteristics are jointly determined or that the legal system variable simply proxies for a close or historical tie to the exporter of many political-economic institutions, England. Legal orientation exerted little impact on financial institution growth at the turn of the century and provides no consistent prediction of real economic growth rates over the past 150 years. Finally, political structure relates significantly to market orientation but not to banking system design or legal tradition. Nonetheless, many individual country histories make it clear that political forces played important roles in shaping regulations that in turn altered the course of financial institutions and markets. The results here simply suggest that these political forces appeared inconsistently and had no traceable, uniform relationship to the overall political system in place in the nineteenth century. The results underscore two principal themes: the weight of history in determining the growth and design of financial institutions and markets, and the importance of idiosyncratic forces that buffet institutions over time. Despite obvious connections among political, legal, economic, and financial institutions, robust, long-term, causal relationships often prove to be elusive.

Industrial Organization of Financial Systems and Strategic Use of Relationship Banking

Using standard Industrial Organization tools, we analyze the relation between competition in arm's length financial markets and the prevalence of close bank-firms ties. We show how the degree of competition between financial intermediaries affects the intensity of relationships between banks and client firms, and explore the idea that investment in bank-firm relationships can be used strategically by incumbent multi-product (universal) banks to limit competition in arm's length markets. The analysis implies that reforms designed to facilitate entry of new intermediaries may actually induce incumbent banks to increase investment in relationship banking, so that regulatory entry barriers are replaced by entry barriers created endogenously, namely, there is “path dependence” in the market structure of financial systems. This result suggests that increased (potential) competition in the financial services industry will not always destroy bank-firm relationships but, on the contrary, may actually strengthen them. JEL classification numbers: G21, L1

Financial regimes, capital structure, and growth

We develop a growth model with endogenous technological progress in which the financial sector plays an explicit role. This allows us to consider the role of different financial regimes in the growth process. We contrast a bank-dominated financial system with a market-dominated system. In the former a financial intermediary (a bank) is able to solve informational problems; at a cost, however. There is learning by doing (LBD) in the banking sector. We investigate circumstances under which each of the two regimes emerges. History matters and the emergence of the low-growth regime is feasible. In a second step, we allow an endogenous capital structure choice of firms and analyze the evolution of the financial system and capital structure over time.

Deposit insurance: Is it a plausible option for the Eastern Caribbean Currency Union?

This paper examines the structure of the financial system in the Eastern Caribbean with a view to determining whether deposit insurance is a feasible alternative. It is argued that as the financial system deepens within the context of a liberalised environment the probability of systemic risk increases considerably. Against this backdrop, we find that deposit insurance may have a role to play in the Eastern Caribbean.

Finance Capitalism Unveiled: Banks and the German Political Economy

If we are moving toward one global financial market, will all national financial systems that determine how businesses raise money look the same? Richard Deeg argues that, despite financial market integration and considerable harmonization in the regulation of financial markets, the traditional structure and economic functions of national financial systems are not inevitably undermined. Using the case of Germany--a country with a strong and distinctive financial sector that is at the center of the pressures of economic integration--the author shows how the unique aspects of the German financial sector and its relationship to the German economy have persisted notwithstanding powerful pressures to change. Posing the German model of coordinated capitalism in which banks play an important role in shaping both firm behavior and the possibilities for state intervention in the economy against the liberal model of the United States and Britain in which the securities markets play a much greater role than banks, Deeg shows how the German model has survived competitive pressures in the international economic system that have pushed Germany--and other countries--toward the liberal model. This book will appeal to political scientists and economists interested in international financial markets, globalization, and the comparative study of domestic financial markets, as well as in German politics and the German economy. Richard Deeg is Assistant Professor of Political Science, Temple University.

Firms, institutions and management control: the comparative analysis of coordination and control systems

It is becoming increasingly recognized that management accounting and management control procedures and systems vary significantly between organizations, sectors and societies. Four characteristics of control systems, in particular, differ considerably between institutional contexts. These are: the extent to which control is exercised overwhelmingly through formal rules and procedures, the degree of control exercised over how unit activities are carried out, the influence and involvement of unit members in exercising control, and the scope of the information used by the control system in evaluating performance and deciding rewards and sanctions. These four characteristics can be combined to constitute four distinct types of control system: bureaucratic, output, delegated and patriarchal. The relative use of these kinds of control systems—and their effectiveness—reflect major variations in the kinds of organizations and firms that coordinate economic activities through administrative procedures, and their related institutional contexts. The key features of firms here are the diversity of activities coordinated, their rate of change, shareholder lock-in and the degree of owner management. These in turn reflect the nature of the financial system and state structures and policies. Additionally, the ways that skill development is organised in a society and skills are controlled in labour markets affect control techniques and practices, as do the nature of authority and trust relations. Thus, Taylorian control systems are unlikely to be widely used in countries where skill training is highly organised and controlled jointly by employers and unions—as for example in many Central and Northern European states, just as delegated ones are improbable in societies where systemic trust is low and authority patterns are patriarchal. ©

Finance, Investment and Growth

This paper evaluates the relations between industrial activity and the structure of financial systems, corporate sectors and legal arrangements in different countries. Using data from 20 OECD countries in 27 industries over the period 1970 to 1995, we evaluate whether there is a link between industry activity and a combination of country structures and industry characteristics. We find significant interrelations between the two both in terms of industry growth rates and investment shares. The relations are sensitive to countries' stages of economic development: for example, the link between concentration of ownership and economic activity is of opposite sign in low and high income countries. There is strong evidence that the relations between financial structure and economic activity come through expenditures on R&D rather than fixed capital formation.