This essay Zysman has a total of 1073 words and 8 pages.
Zysman (1983) has identified three types of financial systems, these include
1) A capital-market based system in which resources are allocated in competitive markets based on prices
2) A credit-based system in which critical prices are administered by government
3) A credit-based system under the dominion of financial institutions
Within a capital-market based system such as the USA and the UK, organisations access capital in many ways depending on costs and terms. Stock markets are highly developed and specialised financial institutions compete for capital and assets through market-based transactions. For example in the UK “in the early 1980s, shares quoted on the stock market represented over 4,000 companies whereas the equivalent figure for Germany was only 500 companies.” The role of the state is mainly regulatory. Financial institutions do not usually influence firms internally, and relationships between banks and firms are described as short term orientated. Borrower and lender often meet across competitive markets with the help of intermediary institutions.
In Zysman’s classification of the three types of financial system he characterises two types of credit-based systems. However they are distinguished by the different roles that the state plays in each.
Within a credit-based governmental system such as France and Japan the state becomes an active player with different levels of intervention. On the other hand for example, in Germany which has a credit-based system and centred on the universal private banks is dominated by a limited number of financial institutions, independent of government intervention. In both of these cases capital markets are not as strong. In the latter type the majority of investment credit is provided by banks, which in some cases actually own amounts of their client firm’s shares. This encourages risk-sharing amongst banks and organisations, and usually provides companies with a more long-term business strategy.
Depending on the particular financial structure a country has they will cope with international financial developments and pressures in different ways. For example some levels of government intervention will be common to all countries. They can influence firms through the financial system. The three distinct financial system structures decide if the financial institutions have control on the companies through the processes of exit, entrance or voice.
The term influence through exit means that if a company doesn’t agree with a price or service the company may choose to leave and is taken elsewhere.
On the other hand influence through voice means although again you may not agree with the service or price on offer, you still stay as a customer but in this case exert pressure on management for reform.
Entrance to and exit from the financial market for a capital-market based system such as the UK or USA is a relatively easy process. The constant flow of firms entering and exiting in turn affects the price of financial assets by shifting the price up or down and so making it more or less attractive to potential buyers.
However due to the structural differences of a credit-based system it is more difficult for financial institutions to exit and so due to this they have a duty to stay loyal to customers. However despite this, the financial institution within this more rigid structure will still ensure their voices are heard. For a credit-based financial system in which critical prices are administered by government, the voice of both the government and financial institutions will be heard.
However on the other hand a credit-based system under the dominion of financial institutions will more often be heard on their own.
Another important issue to be looked at is how the financial institutions are funded and as well as this the transformation of savings into investment.
“Within a developed economy, the financial system is made up of households, firms, financial intermediaries and the government.” (Grinblatt and Titman 1998) These financial intermediaries are organisations like banks which accumulate people’s and organisations’ savings and transfer them to firms that use the capital to finance their investments. For example when a customer deposits money into a savings account with a bank they will receive a percentage of interest and as this accumulates it becomes an investment for them. However the bank will then also give out loans to customers but at an even greater rate of interest and so by this process it makes a profit from the difference between the
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