The Roles of Banks in Financial Systems

Franklin Allen and Elena Carletti

in The Oxford Handbook of Banking

Published in print January 2012 | ISBN: 9780199640935
Published online September 2012 | | DOI:

Series: Oxford Handbooks in Finance

 The Roles of Banks in Financial Systems

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This article examines the roles of banks in ameliorating informational asymmetries that may arise between lenders and borrowers; providing inter-temporal smoothing of risk; and contributing to economic growth in Europe, the US, and Asia. In general, Euro area countries have small but rapidly developing stock markets. Bank lending relative to GDP is substantial, and bond markets play an important role in the financial system. The UK has a large stock market and a large banking sector, but the UK bond market is relatively small. The US banking sector is small in relation to the size of the US economy, but both the stock market and the bond market are relatively large. Japan has a relatively large banking sector and highly developed capital markets. The roles of bank-based and market-based banking systems are compared and aspects relating to relationship banking and the finance and growth debate are discussed. An interesting finding is that market-based financial systems such as in the US tend to be more innovative than bank-based systems.

Keywords: banking industry; bank lending; bond markets; stock market; bank-based banking systems; market-based banking systems; relationship banking

Article.  9030 words. 

Subjects: Economics ; Financial Markets ; Public Economics

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