Comparing Financial Systems Essay Example | Topics and Well Written Essays - 5000 words

Comparing Financial Systems - Essay Example Economic globalization is the utopia towards which the world is moving. Yet, it is deemed to be practically impossible due to the different financial systems that exist in different countries. While some countries have a severely competitive market, others have a bank based economic system. Bank based system poses to secure ‘and mobilize savings, allocating capital, overseeing the investment decisions of corporate managers and also providing risk management vehicles.1’ Whereas, the market system is more competitive in a dual way. Different companies in the market are competing with each other and also the companies compete with the banks, which are still considered to be the conventional mode of getting savings earned by people. Yet, in the countries like U.K and U.S.A, people do risk to invest in the share markets and other companies which often help them earn more money than bank interest. Many analysts across the world have suggested that the market based financial sy stem is more lucrative than the bank based system, but the risk factor involved is also very high as compared to the bank based system, which has minimal risk factor. Now a study on the different financial systems of the world is bound to raise crucial questions which will be chronologically answered in the report. Chapter 1 Broad Classification of the Financial Systems – Bank Versus Market The development of any country is based on the reforms introduced and to introduce any reform, a stable financial system is very necessary. Structural reforms are mostly based on the financial system of a country. Most developing nations which have a centralized economy lack a full fledged financial system which is a big disadvantage for them. Financial system has a vast positive impact of financial development on economic growth and development 2. The financial structure among countries can be either bank based or market based or underdeveloped. The underdeveloped economies have both unde rdeveloped banks and market values. But flourishing financial systems can fall into either bank based financial system or market based one. It is popularly assumed that bank based financial systems are less flourishing compared to the market based ones but Japan stands as the biggest flourishing example of bank based financial system. Countries with a stronger economy and monetary strength have better developed financial systems. The countries which have a higher income always tend to get inclined towards the market based financial system because in these countries the stock market has higher efficiency and are relatively more active compared to the banks. The countries which have low corruption and protect shareholder’s rights are more inclined to the banks as they are looking for security more than earning 3. The bank based concentrates on the different roles of the banks such as getting information about the firm, the board of directors and trying their best to improve the allocation of funds as well as corporate governance. It also