Market Oriented vs Bank Oriented Financial Systems: Incomplete Contracts and Long Term Commitments

This paper proposes a model to explain the bank-firm relationship in bank-oriented financial systems, with particutar attention to the rationalization of the cooperative attitude of banks towards borrowers iin financial l distress. In a competitive environment, where binding long term contracts are not avaible, banks might not by willing to bear the cost of a firm reorganization since competition could bid away future profits, thus preventing banks from recovering reorganization costs. However, we are able to show that even in a context of perfectly competitive credit markets and with the absence of complete contracts, there exists an equilibrium in which banks always reorganize firms in financial distress. The model is able to provide explanations forthe differences in financing practices existing between Anglo-Saxon economies (market-oriented systems) and German-Japanese economies (banK-oriented systems).