wp442 bank based or market based financial system what is be.pdf


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Bank-Based or Market-Based Financial Systems:
Which is Better?*
Ross Levine
Department of Finance
Carlson School of Management
University of Minnesota
Minneapolis, MN 55455
February 2002
Abstract: For over a century, economists and policy makers have debated the relative merits of
bank-based versus market-based financial systems. Recent research, however, argues that
classifying countries as bank-based or market is not a very fruitful way to distinguish financial
systems. This paper represents the first broad, cross-country examination of which view of
financial structure is more consistent with the data. The results indicate that although overall
financial development is robustly linked with economic growth, there is no support for either the
bank-based or market-based view.
Key Words: Banks, Stock Markets, Law, Economic Growth
JEL Classification: G0; K2; O4

* I thank Daron Acemoglu, Franklin Allen, Maria Carkovic, Nicola Cetorelli, Karla Hoff, Kevin
Kordana, Naomi Lamoreaux, Norman Loayza, Patrick Bolton, Raghuram Rajan, Rene Stulz,
Anjan Thakor, two anonymous referees, and seminar participants at the University of Michigan,
Banco Central de Chile, Federal Reserve Bank of Chicago, Stanford University, University of
Virginia School of Law, and the World Bank for helpful comments.