Summary of Notes on Financial System Development and Political Intervention

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Notes on Financial System Development and Political Intervention summary
New research posits that banks and capital markets “compete, complement” and “co-evolve.”


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Economists Fenghua Song and Anjan Thakor reflect on the ongoing economic debate about financial system architecture. In this report for the World Bank, they answer two questions: How do banks and capital markets interact at different stages of economic development, and what impact does political involvement have on growth? The authors develop a theoretical framework that posits the development of banks and capital markets as complementary, each spurring the other to greater efficiency. The increasing use of securitization – a strategy that capitalizes on the strengths of banking and capital markets – enables this “co-evolution” of markets and banks. The authors’ findings will matter to economists and policy makers who are weighing political intervention in their financial systems. getAbstract recommends this instructive research primarily to policy makers, economists, and students of finance and economic development.

In this summary, you will learn

  • How banks and capital markets “compete, complement” and “co-evolve”
  • Why politicians intervene in the financial system and how they do it
  • What policy issues co-evolving banks and markets present to developing economies


Putting Things in Perspective
Since the 1950s, economists have known that traditional economic theories don’t pay enough attention to the “reciprocal relationships between real development and financial development.” Economic scholars agree that the financial system plays a vital role ...
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About the Authors

Fenghua Song is an assistant professor of finance at Pennsylvania State University. Anjan Thakor is a research associate with the European Corporate Governance Institute and a finance professor at Washington University in St. Louis.

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