Convergence of European Financial Systems: Banks or Equity Markets?

Recent literature draws a distinction between Anglo-Saxon (capital market oriented) financial systems, as represented by the UK, and Continental (banking oriented) financial systems, as typified by Germany (Doukas, Murinde and Wihlborg 1998). It is useful, however, to note that in a conventional sense the term ‘banking’ involves bank lending via the creation of demand deposits in connection with a debt contract between the bank and the borrower, deposit taking and the provision of associated money transmission services to the public. Nevertheless, banks, especially in the European Union, are increasingly engaging in both banking and securities business, i.e. universal banking, fund management and, more recently, insurance business (‘bancassurance’ or ‘Allfinance’). The expression ‘bank oriented’ may therefore have various interpretations. It can mean a system in which banks are the dominant institutions providing both indirect finance (or intermediated debt) and access to direct finance from the money and capital markets via instruments such as commercial bills and paper (money market debt finance), bonds and Euro-notes (capital market debt finance) or shares (capital market equity finance), inter alia. The key distinctions here are between direct and indirect finance and between debt and equity financing. But since banking fundamentally involves the provision of indirect finance, ‘bank oriented’ could also be taken more narrowly to mean that the most important source of external financing for non-financial companies (NFCs) is bank loans.