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.
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.