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Financial Structure and Incentives

Published online by Cambridge University Press:  26 March 2020

Martin Čihák  and
Asli Demirgüç-Kunt
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Abstract

The article connects two streams of recent research on the financial sector. The first is the regulation literature, which emphasises the central role of incentives in the financial sector. It points out that the challenge of financial sector regulation, highlighted by the global financial crisis, is to align private incentives with public interest without taxing or subsidising private risk-taking. The second stream of research relates to financial structures and examines the mix of financial institutions and financial markets in an economy. It finds that, as economies develop, services provided by financial markets become comparatively more important than those provided by banks. The article brings these two streams together, pointing out that — as financial systems develop from bank-based to market-based — a traditional regulatory approach that relies on banking ratios becomes less effective. There is thus a greater need for properly monitoring and addressing the underlying incentive weaknesses in market-based systems.

Keywords

Financial sectorfinancial systemseconomic development
Type
Research Articles
Information
National Institute Economic Review , Volume 221 , July 2012 , pp. R23 - R30
Copyright
Copyright © 2012 National Institute of Economic and Social Research

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Footnotes

∗

World Bank, Washington, D.C. Emails: [email protected] and [email protected]. The views expressed in this paper are those of the authors and do not necessarily represent those of the World Bank or World Bank policy. The authors’ thinking on financial structure and incentives has benefited from discussions with Ross Levine and Barry Johnston, respectively, as well as from comments at a World Bank seminar. Any remaining errors are those of the authors.

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