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Financial System Architecture

Arnoud W. A. Boot1; Anjan V. Thakor2

1 University of Amsterdam · 2 University of Michigan–Ann Arbor

Review of Financial Studies 1997

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.

DOI
10.1093/rfs/10.3.693
Volume
10 (3)
Pages
693-733
Language
en
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BibTeX
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