FINANCIAL STRUCTURE

GROUP A BY
CHAN KWAN TING
ROSETTA AWOONOR-RENNER
Concept of Financial Structure
Financial Structure consists of three elements namely
• assets,
• liabilities
• capital.
It refers to the way the firm’s assets are financed.
Factors Determining Financial Structure
• Trading on Equity or Leverage
• Capital Gearing
• Cost of Capital
• Maximum Control
• Cash Flow Ability
• Flexibility
• Size
• Economic environment
A wide range of systems has raised these
questions
• which system is the best in particular circumstances?
• Should Countries Promote Bank or Market Based Financial Systems?
• Which System Promotes Economic Growth and Stability More
Effectively ?
• Is Optimal Financial Structure a Useful Concept?
Which system is the best in particular circumstances?
Bank-Based Versus Market-Based
Pros Pros

• Improves capital allocation and corporate  Least cost production methods and
governance efficiency

• Makes investment more efficient  Promotes innovation and technology

advances
• Creates economies of scale and Promote
growth in developing countries
 Economic freedom

Market-based Financial
Bank-Based Financial System
Systems
Cons
• Can prevent innovation
Cons • Possibility of collusion
• Creates distortion of investments • Weak in economies where markets are
• Can be unstable well developed and possess strong
• Promotes social and economic shareholder rights.
inequalities
Is Optimal Financial Structure a Useful Concept?

• Bank-based versus market-based a dubious dichotomy – more

multidimensional approach required
• Economies of scale
• Narrow view of financial services
• Key question becomes optimal financial infrastructure
• No uniform bank-based model: foreign vs local; small vs big banks;
diversification vs concentration; banks vs Telco's etc.
Why, When and How?
• Research points to the environment in which the systems operate
that defines which structure will be present in the economy
Why
• financial development allows economies to exploit the financial market
When
financial systems is stabile ( lesions from1930 depression, 2008
recession)
How TRUST
Eg. The Bank of England has developed its techniques of intervention to
an extent where banking panics have been partially eliminated.