Competition between Banks and Bond Markets: Hardly Impacted or Softly Complemented

Finance systems being extremely bank-centric, which meant that most of the financial risks were being concentrated in the banking system, there is a need for alternate channel of intermediation that could be used if the banks once again encountered difficulty. Moreover, bonds are increasingly supplementing bank lending as a source of finance for the private sector. On the other hand, the relative unimportance of the corporate bond market in Europe was mirrored by the corresponding dominance of the banking sector. Although there is no definitive evidence that either a market-based or bank-dominated financial system is better, arguments, that a more diversified financial system would mitigate its vulnerab ility to systemic risk, are made. With the instruments of comparative analysis, underdeveloped bond markets and dependence on bank finance are topics of concern of this paper as well as an aim to examine other competing factors on impacts of banking on bond markets, banking substitution and mixed market models are argued.