Market-based finance vs. bank-based finance- Robin Trehan

Dec. 16, 2008 - PRLog -- Market-based finance vs. bank-based finance- Robin Trehan

It has been debated for many decades now whether market-based finance or bank-based finance is better.  In a market-based economy system, the majority of financial power is held by the stock market and the economic mood of the area is dependent on how well or poorly the stock market is doing.  Banks in a market-based financial system are less dependent upon interest from loans and gain much of their revenue through fee-based services such as checking accounts.  In contrast, a bank-based financial system finds the economy dependent on how well or poorly the banking industry is doing. Banks in these systems focus their attention on loans and hold the power largely through this area.  The stock market in these areas has little or no power over economic trends.  

In a market-based financial economy, the wealth is spread more unevenly.  It is constantly shifting and each individual within the society has the opportunity to gain or lose on any given day.  We often find richer countries basing their economic system on the stock market.  In a bank-based financial system, the economy’s wealth is more evenly spread.  Often only a few are given the opportunity to realize great gain. This also works in reverse, as there are fewer individuals who find themselves alone on the lower economic end.

A market-based financial system finds more banks operating to make a profit.  Programs are often in place whereby average consumers can look to non-banking sources for financial sponsorship.  Investments by private systems and the government often compete with those of the bank, forcing banks to adjust their practices and interest rates to compete.  In a bank-based economy, little or no government assistance is available and few members of the private sector are in a position to compete with banks.  Banks in this system, however, are expected to help regulate the economy.  Few are expected to make a profit and are looked upon as a stabilizing force in the economic mood of the area.

Another major difference between the two economic systems is in the legal area. In a bank-based economy, laws are basically set forth and carried out by the government.  This is based mainly on civil law rather than common law.  Common law is less defined and can vary from case to case.  Rather than being set up and enforced by the government, a separate legal system is in place that employs judges and a law-making body.  Market-based financial systems are found most often in areas that employ a common law legal system.

While the factors behind either a market-based system or a bank-based system are few, they are major.  Determining which of the two systems is the better one is nearly impossible. The best we can do is decide which system is best for the environment in which it is to exist.

# # #

Investment banking for mid market Mergers & Acquisition Specialists. Credit Capital Funding is an alternative asset management and advisory firm with a focus on equity investments in middle-market companies and real estate that hold significant opportunities to create value.