Review of Financial Studies Vol. 10 No. 3 1997
Financial System Architecture
Abstract
This article builds a theory of financial system architecture. We ask: what is a financial market, what is a bank, and what determines the economic role of each? Starting with basic assumptions about primitives–the types of agents and the nature of informational asymmetries–we provide a theory that explains which agents coalesce to form banks and which trade in the capital market. It is shown that borrowers of higher observable qualities access the financial market. Moreover, a financial system in its infancy will be bank-dominated, and increased financial market sophistication diminishes bank lending.
- Volume
- 10
- Issue
- 3
- Pages
- 693-733
- Sources
- bibtex:phds-export.bib