Financial System Architecture and the Co-evolution of Banks and Capital Markets
Abstract
We examine financial system architecture evolution and show that banks and markets exhibit three forms of interaction: competition, complementarity and co-evolution. Co-evolution is generated by two elements missing in previous analyses: securitisation and bank equity capital. As banks evolve via improvements in credit screening, they securitise higher quality credits. This encourages greater investor participation and spurs capital market evolution. And, if capital market evolution is spurred by greater investor participation, banks find it cheaper to raise equity capital to satisfy endogenously arising risk-sensitive capital requirements. Bank evolution is thus stimulated as banks consequently serve previously unserved high-risk borrowers. Numerous additional results are obtained. Copyright � The Author(s). Journal compilation � Royal Economic Society 2010.Download Info
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Bibliographic Info
Article provided by Royal Economic Society in its journal The Economic Journal.
Volume (Year): 120 (2010)
Issue (Month): 547 (09)
Pages: 1021-1055
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Timothy Bianco & Dieter Gramlich & Mikhail V. Oet & Stephen J. Ong, 2012. "Financial stress index: a lens for supervising the financial system," Working Paper 1237, Federal Reserve Bank of Cleveland.
- Adeline Saillard & Thomas Url, 2011. "Venture capital in bank - and market - based economies," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00593962, HAL.
- Adeline Saillard & Thomas Url, 2011. "Venture capital in bank - and market - based economies," Documents de travail du Centre d'Economie de la Sorbonne 11025, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
- Adeline Saillard & Thomas Url, 2011. "Venture Capital in Bank- and Market-based Economies," WIFO Working Papers 389, WIFO.
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