Levine, R., (2002
BANK-BASED OR MARKET-BASED FINANCIAL SYSTEMS

Bank-based financial systems are those in which banks play the primary role in providing financial services in an economy. This type of financial system is typically characterized by tight government regulations and a reliance on banks to provide loans and other financing instruments to businesses and households. In a bank-based financial system, households and businesses typically save at banks and banks use these deposits to lend money to support economic development and to purchase assets such as bonds and stocks. The main advantage of a bank-based financial system is that it provides stability, since banks are tightly regulated by the government and thus provide a certain level of consistency and stability in their lending and borrowing activities. Alternatively, market-based financial systems are those in which the market participants - such as corporations, households, and non-bank financial institutions - play the primary role in providing financial services in an economy. This type of financial system is typically characterized by fewer government regulations and a reliance on the free market to provide financing services. In a market-based financial system, households and businesses typically borrow through the issuance of bonds, stocks, and other financial instruments such as derivatives and securitization. This type of financial system provides greater flexibility and access to capital for both households and businesses, but it is also associated with higher risk due to its lack of government regulation.