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Bank-based versus market-based financing: implications for systemic risk

Joost Bats () and Aerdt Houben ()

DNB Working Papers from Netherlands Central Bank, Research Department

Abstract: 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. A fixed effects regression model is estimated over a panel of 22 OECD countries. The results show that bank-based financing generates systemic risk while market-based debt and especially market-based stock financing reduce systemic risk. A threshold regression model estimated over the same panel suggests that banks no longer contribute to systemic risk when there is little bank-based financing. In the case of relatively market-based financial structures, the influence of banks on systemic risk is low. The findings indicate that countries can increase their resilience to systemic risk by reducing the share of bank-based financing and increasing the share of market-based financing.

Keywords: financial structure; systemic risk; bank-based financing; market-based financing (search for similar items in EconPapers)
JEL-codes: E44 G10 G21 O16 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-mac
Date: 2017-12
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