Financial Markets and Institutions (2-downloads)

4. Financial intermediaries, particularly banks, are the most important

source of external funds used to finance businesses.

As we can see

in Figure 7.1, the primary source of external funds for businesses throughout

the world comprises loans made by banks and other nonbank financial inter-

mediaries such as insurance companies, pension funds, and finance compa-

nies (56% in the United States, but more than 70% in Germany, Japan, and

Canada). In other industrialized countries, bank loans are the largest category

of sources of external finance (more than 70% in Germany and Japan and more

than 50% in Canada). Thus, the data suggest that banks in these countries have

the most important role in financing business activities. In developing countries,

United States

Germany

Japan

Canada

%

0

10

20

30

40

50

60

70

80

90

100

Stock

Bonds

Nonbank Loans

Bank Loans

18%

38%

10% 8%

18%

32%

7% 9%

15%

11% 8%

5%

12%

76% 78%

56%

F I G U R E   7 . 1

Sources of External Funds for Nonfinancial Businesses: A Comparison 

of the United States with Germany, Japan, and Canada

Source: Andreas Hackethal and Reinhard H. Schmidt, “Financing Patterns: Measurement Concepts and Empirical Results,”

Johann Wolfgang Goethe-Universitat Working Paper No. 125, January 2004. The data are from 1970–2000 and are

gross flows as percentages of the total, not including trade and other credit data, which are not available.

---

Chapter 7 Why Do Financial Institutions Exist?

137

banks play an even more important role in the financial system than they do

in the industrialized countries. What makes banks so important to the workings

of the financial system? Although banks remain important, their share of exter-

nal funds for businesses has been declining in recent years. What is driving

this decline?