Working Paper: NBER ID: w10908
Authors: Stephen G. Cecchetti; Stefan Krause
Abstract: Countries around the world differ substantially in the relative importance of their banks and capital markets in providing investment financing. This paper examines one potential explanation for the cross-country differences in the importance of banks and capital market financing of investment. It is our contention that much of the variation across countries in the depth and breadth of capital markets can be explained by a combination of the existence of deposit insurance and the extent to which a country's banking system is state owned. We provide both an equilibrium model predicting and empirical evidence showing that countries with explicit deposit insurance and a high degree of state-owned bank assets have smaller equity markets, a lower number of publicly traded firms and a smaller amount of bank credit to the private sector. Finally, our results suggest that the effects of deposit guarantees are more important than the origins of national legal systems.
Keywords: deposit insurance; capital markets; state ownership; financial intermediation
JEL Codes: G21; G22; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| deposit insurance (G28) | shift in household asset allocation away from capital markets towards banks (D14) |
| decrease in state-owned bank assets (G21) | increase in the size of capital market (G10) |
| decrease in state-owned bank assets (G21) | increase in bank lending (G21) |
| deposit insurance (G28) | reduction in equity issuance (G32) |
| explicit deposit insurance (G28) | smaller equity markets (G19) |
| state ownership of banks (G21) | smaller equity markets (G19) |
| explicit deposit insurance (G28) | fewer publicly traded firms (G34) |
| state ownership of banks (G21) | fewer publicly traded firms (G34) |
| explicit deposit insurance (G28) | less bank credit to the private sector (G21) |
| state ownership of banks (G21) | less bank credit to the private sector (G21) |