Literature from the 1990s and 2000s often contrasted so-called market-based financing economies with economies based on bank financing; Lévine (2002) thus asked the question, « Which model [was] the best? »
However , Jeffers and Plihon (2013) consider that the relevant concept for Europe today is that of market-based banking.
This financing system refers to banks that finance themselves on interbank and institutional markets ( wholesale markets [see this other post]) or by issuing certificates of deposit. To compensate for the increased instability of these sources of financing, the risks for debt holders must be limited, on the one hand, by transferring them to the market through the use of derivatives (CDS, securitization, etc.) and, on the other hand, by developing the capacity to absorb banks’ liabilities, in particular throughthe issuance of subordinated or convertibledebt.
Rather than pitting the traditional banking system (« originate to hold » [see this other post]) against the non-banking system (« shadow banking ») as Gorton and Metrick (2010) do, the market-based banking system is a hybrid form born of the interaction between the European universal banking model and innovations in the American securitization market. Thus, in Europe, according to Jeffers and Plihon (2013), shadow banking is found within banks rather than on their periphery.
Thibaut D.
Reference:
Gorton, G. and Metrick, A. (2010). Regulating the Shadow Banking System, Brookings Papers on Economic Activity, 2, 261-297.
Levine, R. (2002). Bank-based or market-based financial systems: Which is better? Journal of Financial Intermediation, 11(4), 398-428.
Jeffers, E. and Plihon, D. (2013). Universal Banking and Shadow Banking in Europe.
