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Press Release

Cultural traits explain why, when seeking financing, businesses in some countries favor banks, while in other countries, they favor stock and bond markets, says Cleveland Fed Economic Commentary

Businesses seek financing from banks and from stock and bond markets, but businesses in different countries tend to favor one or the other. Economists have studied various cultural traits that may explain why some countries favor a bank-oriented system and others favor a markets-oriented system. In a paper released by the Federal Reserve Bank of Cleveland, researchers Raj Aggarwal and John Goodell share the results of their study, which shows that people in bank-oriented countries are less tolerant of uncertainty.

“Bank financing is based mostly on relationships and collateral, while market financing is based mostly on social trust among strangers, high levels of disclosure, and faith in contracts,” explain Aggarwal and Goodell. “Banks are favored when reliable market signals and other information about firms are too difficult or costly for the public to obtain—for example, if accounting standards are weak. By contrast, when there is a good legal environment and governance, market signals are better able to provide this sort of information to public investors, and markets-oriented systems are preferred.”

The orientation of a country’s financial system to banks or markets has real economic implications. Bank financing may be more suitable for smaller companies, physical industries that are well understood, and companies that traditionally have high levels of tangible assets. Stock and bond market financing may be better for more innovative, faster-growing, and technology-oriented industries, which are associated with high levels of uncertainty. “Knowledge of the factors that make a country bank- or markets-oriented is important to policymakers in all countries, but particularly for policymakers in countries where the financial system is still very much in evolution,” say Aggarwal and Goodell.

Raj Aggarwal is a visiting scholar at the Federal Reserve Bank of Cleveland and a professor at the University of Akron. John Goodell is an associate professor at the University of Akron.

Read National Preferences for Bank or Market Financing

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell,, 513.455.4479