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Different Financial Systems
There are two models of financial systems to choose from, a banking
oriented system and a market oriented system .I am going to explain
how real countries fit the alternatives by examining the countries with
the four largest and the most well developed economics in the world
-Germany ,Japan, the united kingdom and the united states .
Germany
Germany is very much a banking oriented financial system .at the core
of the system is the hausbank .there the concept of hausbank a business
relies on a single bank (its hausbank)as its primary source of all forms
of external finance .thus a relationship between a business firm and
its hausbank is a very powerful one .unlike countries where banking
relationship is strictly limited
to debt financing, the hausbank system fosters bank participation in
the strategic activities of German firms through stock ownership and
control ;bankers can also sit on company supervisory
boards.
Bank ownership participation is both direct and indirect .it is direct
because banks can and do own a significant share of many German companies
;in particular ,banks own about 10 percent of public companies in Germany
. however indirect ownership is also more important .many individuals
and institutions in Germany deposit their stock holdings in a trust
account with a bank .as part of this custody arrangement, the voting
rights associated with these shares are conveyed to the bank .thus banks
exercise control over German companies by combining the direct voting
rights from share ownership with the proxy votes they acquire through
their custody
accounts.
Banks in Germany are organized into four major categories: commercial
banks, saving banks, cooperative banks and specialized banks. commercial
banks consist of the there biggest German banks (grossbanken) deutsche
bank ,Dresdner bank ,and commerz bank .these three banks are also significant
players internationally .some of the regional banks are also quite large
and are active participants in international market . The saving banks
are typically owned by
regional and town governments and operate locally .originally established
as thrift institutions collecting deposits and making mortgage loans
.they now offer full commercial banking services
Although their orientation is still emphasized thrift activities. The
cooperative banks were first established in 19 century to collect savings
and extend credit to individuals .the last kind is
the specialized banks whose most important types of them are mortgage
banks that make residential and real estate loans .the mortgage banks
are financed principally by bonds. they also include banks that emphasize
consumer lending ,small business loan guarantees, export finance ,
and industry -specific finance .
The dominance of banks in Germany comes at the expense of the securities
market .the stock, bond, and commercial paper market in Germany can
best be described as suppressed. there are eight regional stock exchanges,
dominated by the Frankfurt exchange .the corporate bond market is minuscule
,as is the commercial paper market perhaps because until 1992 regulations
and taxes made it ridiculously expensive to issue these securities .as
a result most German companies are highly dependent on their banks for
credit .
The dominance of the banking system in Germany is enhanced by a regulatory
framework that permits universal banking .in Germany banks are not only
permitted to own non financial companies, but are also permitted to
underwrite corporate securities to underwrite insurance
Through a subsidiary. The ability to underwrite securities enables a
German bank to handle all of a company’s financial needs effectively
throught its business life cycle.
Japan
The two most important features of Japanese financial system are the
keiretsu form of industrial organization and the emphasis on a firm
relationship with its main bank a keiretsu is a group of companies that
are controlled through interlocking ownership, that is, the companies
own stock in each other. This type of industrial organization encourages
strong loyalty among the companies in the group, including favoritism
in customer supplier relationships.
Like the German financial system, the Japanese system emphasizes firm
loyalty to a single bank
, the main bank in fact each keiretsu has a main bank that typically
owns stocks in other members of the group .as in Germany the Japanese
banks may own equity in non financial companies. Every month the top
managers of the firms in the group get together with large shareholders
and chief creditors at the president club meeting .while these meetings
are not part of the formal
governance structure ,they act very much like the supervisory board
in German companies where planned projects and general firm policy are
discussed.
The banking system is divided into three basic categories, the very
largest city banks, the regional banks, and the special purpose financial
institutions. A disproportionately large fraction of the world’s biggest
banks are Japanese city banks like sanwa bank,dai-ichi kangyo bank ,Fuji
bank
and sumitomo bank. The special purpose institutions include the three
long term credit banks ,specialized small business institutions ,and
specialized agriculture ,forestry, and fishery
institutions. only relatively recently have Japanese regulations permitted
companies to issue commercial papers and corporate bonds .
Unlike Germany stock market in Japan is quite large .the Tokyo stock
exchange is comparable in size to the New York stock exchange and is
sometimes larger depending on the stock price levels
and the exchange rate. Japan has also adopted laws similar to the US
glass steagall act separating commercial banking from investment banking.
as in the US system however the separation between securities underwriting
and commercial banking is eroding .as of 1993 commercial banks in Japan
were permitted to underwrite corporate securities in an affiliate ,subject
to specific permission from the ministry of finance (the regulator of
banks in Japan along with the bank of Japan.)
United Kingdom
Unlike the economies in Germany and Japan, the financial system of the
United Kingdom is very much market oriented, although banks play a very
important role .London is somewhat unique because it serves as both
a domestic financial market for UK business as well as the center for
the Euro bond market .because of a regularity environment that encourages
foreign participation
and competition in financial services ,the domestic markets are not
really distinct from foreign markets. UK companies issue Euro bond market
and foreign companies, as well as domestic, list
stock on the London stock exchange .
The banking system consist of five categories: clearing banks, merchant
banks, other British banks, foreign banks, and other deposit taking
institutions .the clearing banks dominated by Barclay's bank, national
west minister, midland bank, and Lloyd’s bank are universal banks and
conduct securities activities through investment banking subsidiaries,
in addition to having extensive branch networks thought the United Kingdom.
The merchant banks provide wholesale
banking services to large corporations, including offering loan commitments
and guarantees, derivatives products and international trade finance
.in many ways they are more like US investment banks than traditional
commercial banks .the other British banks,as their name implies ,are
an eclectic group consisting of some institutions similar to merchant
banks and others ,which are specialized institutions that emphasize
such activities as consumer lending.
The other deposit taking institutions are mostly building societies,
which are mutual organizations similar to saving and loan associations
in the United States. banks in the united kingdom do not for the most
part own non financial corporations .while there are no explicit restrictions
prohibiting bank equity ownership, the bank of England (the regulator
of banks in united kingdom) has generally discouraged the practice in
order to promote a safer banking system .the lack of formal restrictions
explicitly prohibiting bank stock ownership must be viewed in the overall
context of
British bank regulation.
United States
Suffice it to say that the very large stock, bond, and commercial paper
markets made the united states the prototype of a market oriented system
.moreover the securitization of residential mortgages and other types
of financial assets ,such as credit card receivable and auto loans ,have
further strengthened the importance of the traded securities markets.
on the other hand although US banks are not the primary providers of
external finance to large corporations ,they do play a key role in external
finance for small and mid size companies .and, of course the glass-steagall
act prohibits commercial banks from owning equity in non financial companies
,although bank holding companies are permitted very limited ownership
privileges.
Eastern Europe and other emerging economies
With the break up of communism and the soviet union ,the eastern European
countries were faced
with daunting challenge of building a financial system from square one
.one of the first initiatives
was to develop privatization programs designed to transform government
owned companies into privately owned firms . these privatization programs
typically involved distribution of shares to the major stock holders
(employees ,managers ,and creditors )in the industrial firm that are
privatized .most of the early privatization efforts focused on small
and midsized companies rather than the large industrial companies .
As best, Eastern Europe can be viewed as an information-poor environment
where even activities of large firms are cloaked and fog .rating agencies
for most parts don't exist. Reputation building is extremely difficult
because most companies have not existed long enough to develop reputations
-except for producing shoddy goods under communism. More over the lack
of managerial talent and experience in Eastern Europe suggests that
investor monitoring will be especially critical in these countries.
In banking oriented systems, banks are the principal lenders to both
small and large businesses, and banks own and control large corporations.
in markets-oriented systems large companies are diffusely held, and
they borrow most of their funds in the securities markets rather than
from banks .with their huge banking system and extensive bank ownership
of business enterprise Germany and Japan are decidedly banking oriented
systems .the relative importance of securities markets in the united
kingdom and the united states makes these systems market oriented.
Recommended reading: From
Gold to Euro: On Monetary Theory and the History of Currency Systems
This book shows that the use of money transforms a market economy into
a payment society where production and employment are subordinated to
the logic of asset markets. Monetary policy emerged out of private banking
business and was always exposed to the risk of losing credibility and
reputation. The stability of key currency systems was based on different
policy preferences.
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