Are bank-based or market-based financial systems better?

Abstract

For over a century, economists and policy makers have debated the relative merits of bank-based versus market-based financial systems. Recently, however, proponents of the legal-based view of financial development have argued that the century long debate concerning bank-based versus market-based financial systems is analytically vacuous. According to this view, the critical issue is establishing a legal environment in which both banks and markets can operate effectively. This paper represents the first broad, cross-country examination of which view of financial structure and economic growth is most consistent with the data.