Different Financial Systems

Different Financial Systems

there are two models of financial systems to choose from, a banking oriented system and a market oriented system .I am going to explain how real countries fit the alternatives by examining the countries with the four largest and the most well developed economics in the world -Germany ,Japan, the united kingdom and the united states .

Germany
Germany is very much a banking oriented financial system .at the core of the system is the hausbank .there the concept of hausbank a business relies on a single bank (its hausbank)as its primary source of all forms of external finance .thus a relationship between a business firm and its hausbank is a very powerful one .unlike countries where banking relationship is strictly limited
to debt financing, the hausbank system fosters bank participation in the strategic activities of German firms through stock ownership and control ;bankers can also sit on company supervisory
boards.

bank ownership participation is both direct and indirect .it is direct because banks can and do own a significant share of many German companies ;in particular ,banks own about 10 percent of public companies in Germany . however indirect ownership is also more important .many individuals and institutions in Germany deposit their stock holdings in a trust account with a bank .as part of this custody arrangement, the voting rights associated with these shares are conveyed to the bank .thus banks exercise control over German companies by combining the direct voting rights from share ownership with the proxy votes they acquire through their custody
accounts.

Banks in Germany are organized into four major categories: commercial banks, saving banks, cooperative banks and specialized banks. commercial banks consist of the there biggest German banks (grossbanken) deutsche bank ,Dresdner bank ,and commerz bank .these three banks are also significant players internationally .some of the regional banks are also quite large
and are active participants in international market . The saving banks are typically owned by
regional and town governments and operate locally .originally established as thrift institutions collecting deposits and making mortgage loans .they now offer full commercial banking services
Although their orientation is still emphasized thrift activities. The cooperative banks were first established in 19 century to collect savings and extend credit to individuals .the last kind is
the specialized banks whose most important types of them are mortgage banks that make residential and real estate loans .the mortgage banks are financed principally by bonds. they also include banks that emphasize consumer lending ,small business loan guarantees, export finance ,
and industry -specific finance .

The dominance of banks in Germany comes at the expense of the securities market .the stock, bond, and commercial paper market in Germany can best be described as suppressed. there are eight regional stock exchanges, dominated by the Frankfurt exchange .the corporate bond market is minuscule ,as is the commercial paper market perhaps because until 1992 regulations and taxes made it ridiculously expensive to issue these securities .as a result most German companies are highly dependent on their banks for credit .

The dominance of the banking system in Germany is enhanced by a regulatory framework that permits universal banking .in Germany banks are not only permitted to own non financial companies, but are also permitted to underwrite corporate securities to underwrite insurance
Through a subsidiary. The ability to underwrite securities enables a German bank to handle all of a company’s financial needs effectively throught its business life cycle.

Japan
The two most important features of Japanese financial system are the keiretsu form of industrial organization and the emphasis on a firm relationship with its main bank a keiretsu is a group of companies that are controlled through interlocking ownership, that is, the companies own stock in each other. This type of industrial organization encourages strong loyalty among the companies in the group, including favoritism in customer supplier relationships.

Like the German financial system, the Japanese system emphasizes firm loyalty to a single bank
, the main bank in fact each keiretsu has a main bank that typically owns stocks in other members of the group .as in Germany the Japanese banks may own equity in non financial companies. Every month the top managers of the firms in the group get together with large shareholders and chief creditors at the president club meeting .while these meetings are not part of the formal
governance structure ,they act very much like the supervisory board in German companies where planned projects and general firm policy are discussed.

The banking system is divided into three basic categories, the very largest city banks, the regional banks, and the special purpose financial institutions. A disproportionately large fraction of the world’s biggest banks are Japanese city banks like sanwa bank,dai-ichi kangyo bank ,Fuji bank
and sumitomo bank. The special purpose institutions include the three long term credit banks ,specialized small business institutions ,and specialized agriculture ,forestry, and fishery
institutions. only relatively recently have Japanese regulations permitted companies to issue commercial papers and corporate bonds .

Unlike Germany stock market in Japan is quite large .the Tokyo stock exchange is comparable in size to the New York stock exchange and is sometimes larger depending on the stock price levels
and the exchange rate. Japan has also adopted laws similar to the US glass steagall act separating commercial banking from investment banking. as in the US system however the separation between securities underwriting and commercial banking is eroding .as of 1993 commercial banks in Japan were permitted to underwrite corporate securities in an affiliate ,subject to specific permission from the ministry of finance (the regulator of banks in Japan along with the bank of Japan.)

United Kingdom
Unlike the economies in Germany and Japan, the financial system of the United Kingdom is very much market oriented, although banks play a very important role .London is somewhat unique because it serves as both a domestic financial market for UK business as well as the center for
the Euro bond market .because of a regularity environment that encourages foreign participation
and competition in financial services ,the domestic markets are not really distinct from foreign markets. UK companies issue Euro bond market and foreign companies, as well as domestic, list
stock on the London stock exchange .

The banking system consist of five categories: clearing banks, merchant banks, other British banks, foreign banks, and other deposit taking institutions .the clearing banks dominated by Barclay's bank, national west minister, midland bank, and Lloyd’s bank are universal banks and conduct securities activities through investment banking subsidiaries, in addition to having extensive branch networks thought the United Kingdom. The merchant banks provide wholesale
banking services to large corporations, including offering loan commitments and guarantees, derivatives products and international trade finance .in many ways they are more like US investment banks than traditional commercial banks .the other British banks,as their name implies ,are an eclectic group consisting of some institutions similar to merchant banks and others ,which are specialized institutions that emphasize such activities as consumer lending.
The other deposit taking institutions are mostly building societies, which are mutual organizations similar to saving and loan associations in the United States. banks in the united kingdom do not for the most part own non financial corporations .while there are no explicit restrictions prohibiting bank equity ownership, the bank of England (the regulator of banks in united kingdom) has generally discouraged the practice in order to promote a safer banking system .the lack of formal restrictions explicitly prohibiting bank stock ownership must be viewed in the overall context of
British bank regulation.

United States
Suffice it to say that the very large stock, bond, and commercial paper markets made the united states the prototype of a market oriented system .moreover the securitization of residential mortgages and other types of financial assets ,such as credit card receivable and auto loans ,have further strengthened the importance of the traded securities markets. on the other hand although US banks are not the primary providers of external finance to large corporations ,they do play a key role in external finance for small and mid size companies .and, of course the glass-steagall act prohibits commercial banks from owning equity in non financial companies ,although bank holding companies are permitted very limited ownership privileges.

Eastern Europe and other emerging economies
with the break up of communism and the soviet union ,the eastern European countries were faced
with daunting challenge of building a financial system from square one .one of the first initiatives
was to develop privatization programs designed to transform government owned companies into privately owned firms . these privatization programs typically involved distribution of shares to the major stock holders (employees ,managers ,and creditors )in the industrial firm that are privatized .most of the early privatization efforts focused on small and midsized companies rather than the large industrial companies .

As best, Eastern Europe can be viewed as an information-poor environment where even activities of large firms are cloaked and fog .rating agencies for most parts don't exist. Reputation building is extremely difficult because most companies have not existed long enough to develop reputations -except for producing shoddy goods under communism. More over the lack of managerial talent and experience in Eastern Europe suggests that investor monitoring will be especially critical in these countries.
In banking oriented systems banks are the principal lenders to both small and large businesses, and banks own and control large corporations. in markets-oriented systems large companies are diffusely held, and they borrow most of their funds in the securities markets rather than from banks .with their huge banking system and extensive bank ownership of business enterprise Germany and Japan are decidedly banking oriented systems .the relative importance of securities markets in the united kingdom and the united states makes these systems market oriented.

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