The shift of financing activity from banks to financial markets, as well as their continued coexistence, raises a number of questions. In this article, Mitchell Berlin discusses some of these questions, such as: What factors determine the relative importance of banks and markets in a financial system in which the two types of finance coexist? Why do so many borrowers continue to use a mixture of bank loans and bonds? And perhaps most important: How does the mix of banks and market finance affect the real economy? That is, how much households save, how firms invest, and how fast the economy grows.

This article appeared in the Second Quarter 2012 edition of Business Review.

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