policymakers demonstrate

Financial Regulation in Europe: Foundations and Challenges 501
11.5.2 Financial Structure: Does Europe Suffer from a Bank Bias?
Beyond concerns about the recovery of different components of the financial
system across Europe, the current discussion on the Capital Market Union has
again put in the forefront the discussion on the financial structure in Europe, not
only within the Eurozone. While previous research has shown the irrelevance
(on average) for economic growth of the degree to which a financial system
was bank- or market-based, more recent research has shown that Europe’s relative
strong reliance of Europe on bank intermediation (both in absolute and
relative terms) might explain the underperformance in growth and the stronger
impact of the recent crisis (e.g., Langfield and Pagano, 2015). This comes in
addition to the observation that certain segments of the financial system critical
for financing young and small enterprises are underdeveloped in most European
countries, including the private equity industry, venture capital and angel
financing. These findings also serve as motivation for a stronger focus on building
sources of equity finance/capital markets in Europe, including the Capital
Market Union initiative.
Contrasting markets and banks, however, might be wrong. Most finance
today is intermediated, even if it goes through public markets, such as public
debt and equity markets. Institutional investors, including insurance companies,
pension and mutual funds play a critical role in financial markets, which is also
reflected in the prominent role of institutional investors in the ownership structure
of publicly listed firms. Financial intermediaries and markets also have
other complementarities. Securitization is an important link between intermediaries
and markets in the cross-section. IPOs of companies financed by venture
capitalists are an important connection over time, between financial intermediaries
and public markets.
The question, therefore, is not necessarily the contrast of the two specific
segments, but rather the fact of having a diversified, if not complete, financial
system. It is in this context that the focus should be on specific segments of
the financial system that play less of a role in Europe in than other developed
regions of the world, including private equity funds, venture capital funds, and
corporate bond markets.
It is also important to take note of the new emerging players, including
nonintermediated forms of bringing savers and entrepreneurs together, such
as peer-to-peer lending and crowd-funding platforms, players who we cannot
easily assign to either the bank- or market components of the financial system.
These platforms work with many borrowers and lenders, with only a limited
role for the platform provider, building on other social media models. Rather
than building on private information acquisition, these new models of financial
intermediation often rely on Big Data collected on potential borrowers
based on social media. As discussed before, the emergence of new players is an