Analysis of the Methods of Financing Growth - Essay Example

Institute FINANCIAL GROWTH Topic: It is generally observed that financial systems around the globe perform similar functions, yet when we examine them closely we find that how and what they contribute in their growth-inducing role is markedly different. Evaluate and discuss this statement. FINANCIAL GROWTH According to the conventional theories of financial intermediation, the intimidation stands on the transaction cost and required use full information. They are considered to do work by taking deposits and issue the insurance policy this is the method to provide finance to accompany. By now a day’s there is a considerable change in these methods that the transaction cost and use full information concept removed and intimidation become increased in today’s financial market the concept of as an individual who did all the work, become demolish and now intermediation replace their positions. It’s difficult to bring these changes with the traditional method of financing growth. There is also a tendency in the direction of cross border Merger and Acquisitions among great financial service firms in unlike nations. These cross border merger and acquisitions frequently engage big universal sort of institutions that give numerous types of financial services in numerous nations. There are two basic methods which used nowadays that are bank intermediation based method and market based financial system (Leyland and Pyle 1977). We know that there is a diversification of financial systems in different countries. Most of these countries have bank intermediations and market based financial system but the importance of these systems is comparatively different from each other. The country like the United States has “market based financial system” the financial market has an important role in the financial environment of the country and the banks intimidation is insignificant (Ross Levine 2002). The other country like Germany has “bank intimidation based” financial market, in this financial environment banks control the allocation of credit and financial markets are not as much important. Besides this is confirmed that the financial system vary from each other according to different countries and due to this the financial growth rate also different for each country according to their selection of the financial system. Different countries select different financial system because every financial system has performed their own functions and due to the difference in the functions vary the financial growth. (Frakline Allen 1997) Worldwide spread banking is a substitute method to a stock market to share the risk, collect information for providing the guidance for the purpose to make the information and for the purpose to match the corporate governance of different countries. Here we discuss about the Germany, where the size of the stock market has been small & banks carry the entire risk related to the equity, right of proxy regarding the other’s shares. In other hand banks working as the representative to manage the affairs like to borrow loan and other corporate activities. The thing which needs to examine that is whether the bank working as the substitute of the stock market or it has the information about the dealings of the firms, if banks working as the substitutes of the stock market then the performance of the firms should improve but if they have some kind of private information regarding the firms then they may be a part of conflicts of firms with the equity holders and with those who voted in proxy through banks. It investigates through the facts and figures that the banks influence the performance of German’s firms and the rest of conflicts arise through this. (Gary Gorton 1999) Banks and other financial intermediaries are the key basis of outsourcing to the firms. Intermediaries supply more than 50 percent of outsource funds from these mention countries like the United States, Japan, the United Kingdom, Germany, and France. The investor’s primary borrows money as a loan through the banks and they do not directly borrow the loan. Diamond gives a model of Financial Intermediation and Delegated Monitoring in which he elaborate the answers to the questions that why the investors borrow loan through banks? What is the financial strategy of banks due to which they serve to investors as an agent? The results of the Diamond’s model elaborate the main function of the debt contract with the bank and the significance of diversification within the financial intermediaries (Hanazaki and Horiuchi 2000). The structure can be used to appreciate the organizational form of intermediaries, the function of banks in capital arrangement, and the effects of rules that maximum bank diversification. Financial intermediaries are a negotiator, or groups of negotiators, who hand over the responsibility to invest in financial resources. In particular, they allot securities in order to buy other securities. A main step in accepting intermediaries is to explain the characteristics of the financial markets where they play a significant role and underline what permit them to supply value able services. It is essential to realize the financial contracts written by intermediaries, how the contracts are differentiated from those that who do not engage in an intimidating, and why these are reasonable financial contracts (Douglas W. 1996). The debt contracts are the main source to understand the intimidation. The cost of examine and implement the debt contracts which is issue openly to the investors it is a reason that increase finance through an intermediary can be advanced. Debt contracts involve the contracts gives to the intermediaries when they borrow the money from bank and the contract give by the intermediaries when they borrow loan from investors. Portfolio diversification within the financial intermediaries is the financial technology that leads a bank for the transformation of loans which need value able supervision and checking into bank deposits. There is a continuous-time model of liquidity condition by banks, in which customers can drop and extract their money and finance intentionally. This intentional submit and withdrawal choice establish an profitable and compatible problem that put the problem of designing deposit contracts into a unusual an irregular substandard, non-convex best possible organized problem. This model expand a explanation, solution and method for resolving the problem and demonstrate that, in this more common framework, the approaches which achieve from the conventional. Mergers and acquisitions between extremely large financial institutions are appropriate further numerous in markets about the world, pull towards you the attention of policy makers, researchers, and the financial press and frequently reorganize the position of the worlds major financial services firms (Ernst-Ludwig 2002). There is also a tendency in the direction of cross border Merger and Acquisitions among great financial service firms in unlike nations. These cross border merger and acquisitions frequently engage big universal sort of institutions that give numerous types of financial services in numerous nations. In Europe, there is a significant consolidation of all types of financial institutions’ market values of cross border mergers and acquisitions connecting in Europ with all financial organizations that have really surpassed the principles of within nation merger and acquisitions in modern years (James Kolari 1988). Most probably the increase in consolidation is because of the market reaction in response to the deregulation in the United States and the particular Market Program in the European Union (EU). The change in the policy from the government and market reaction, may add a sudden extra consolidation of some big organizations too, with significant social importance for universal risk, the protection net and monetary policy as well as for competence and market power in the financial services industry (Diamond, D. 1996). In this paper, we deal with these matters in three ways. First, we widely evaluation numerous research studies on the reason and results of consolidation, cover up the topics of competence, market power, managerial and government purpose, and effects. Second, we supply a number of appropriate evocative information, as well as data evaluate the financial systems in different nations. The literature evaluation and give some descriptive measures that are proposed in part to give reference substance to encourage future research. Third, we examine cross border banking competence in five countries. For over a century, economists and policy makers have discuss the comparative qualities of bank based financial system beside market based financial systems. Through latest research, dispute that classifies countries as bank based financial system or market is not a very productive way to differentiate financial systems. This paper distinguishes the first extensive, cross country evaluation of which goal of financial structure is more consistent with the information (Fama 1980). The arguments shows that though generally financial development is strongly associated with economic and financial growth, there is no sustain for either the financial system that is a bank based or financial system that is market based. Particular, this paper observed review challenging hypothetical views of financial structure and economic growth (Gortonand Schmid 2000). In the difference, the market based vision stress that markets supply key financial services that motivate innovation and long run growth. Instead, of the financial services vision force the position of bank and markets in researching firms, apply commercial power, generating risk management strategy, and assemble society’s savings for the most creative activities (Santomero 1989). This observation reduced the bank based against market based argue and highlight the excellence of financial services shaped by the whole financial system. The finance analysis, which is a particular case of the financial services observation, argues that the lawful system is the main determinant of financial development. As a result, the finance analysis pressures the position of the officially authorized system in enhances generally financial division growth and for long term growth (Leviene 2002). This paper elaborate the performance of the financial system around the globe in context of the bank based financial system or bank intermediation and market based financial system; find their contribution in the financial growth. In this study the role and performance of the bank in financial systems also measured, it also explain the factors which are in relation with the financial growth like allocation of the resources, by adopting the merger and acquisition policies banks improve their financial conditions, they are working as an agent then an investor want to borrow loan they borrow on the banks behalf (Franklin and Santomero 1997). Most of these countries have bank intermediations and market based financial system but the importance of these systems is comparatively different from each other. As well as this paper explain the relation between bank based financial system and market based financial system through an comparison and make a judgment that which one method of both bank based financial system and market based financial system consider more beneficial in the financial growth (Thakor 1996). Conclusion It’s difficult to bring all changes with the traditional method of financing growth. There is also a tendency in the direction of cross border Merger and Acquisitions among great financial service firms in unlike nations. This paper elaborate the performance of the financial system around the globe in context of the bank based financial system or bank intermediation and market based financial system; find their contribution in the financial growth. In this study the role and performance of the bank in financial systems also measured, it also explain the factors which are in relation with the financial growth. The arguments shows that though generally financial development is strongly associated with economic and financial growth, there is no sustain for either the financial system that is a bank based or financial system that is market based. Particular, this paper observed review challenging hypothetical views of financial structure and economic growth. The thing which needs to examine that is whether the bank working as the substitute of the stock market or it has the information about the dealings of the firms, if banks working as the substitutes of the stock market then the performance of the firms should improve but if they have some kind of private information regarding the firms then they may be a part of conflicts of firms with the equity holders and with those who voted in proxy through banks. BIBLOGRAPHY Ross Levine, (2002). Bank-Based or Market-Based Financial Systems: Which is better? Department of Finance, University of Minnesota, 442. Gray Gorton, Frank A. Schmid (1999). Universal Banking and the performance of German Firms. Journal of Financial Economics. Vol 58(2000). 29-80. Douglas W. Diamond (1996) . Financial Intermediation as Delegated Monitoring: A Simple Example. Federal Reserve Bank of Richmond Economic Quarterly. Vol 82(3). 51-66. Ernst-Ludwig von Thadden (2002). 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