Financial Crises And Regulation Questions
A market-based financial system is characterized by a predominant role of financial markets in channeling funds from savers to borrowers. In this system, financial intermediaries such as banks play a limited role, and the allocation of capital is primarily determined by market forces. Market-based systems rely on securities markets, such as stock and bond markets, for the majority of financing activities.
On the other hand, a bank-based financial system relies heavily on banks as the main source of financing and intermediation. Banks play a central role in mobilizing savings and providing credit to borrowers. In this system, banks have a significant influence on the allocation of capital and the overall functioning of the financial system.
The main difference between these two systems lies in the degree of reliance on financial markets versus banks for financing and intermediation activities. While market-based systems emphasize the role of market forces and securities markets, bank-based systems prioritize the role of banks in the financial system.