Can market-based finance substitute for bank-based finance in the event of a banking crisis?

One argument sometimes raised in favour of financial development ( 1) is that if financial markets are developed and efficient, companies can substitute market-based finance for bank-based finance in the event of a banking crisis. This reduces the severity of crises. We see it is an argument that would mitigate the risk of having a large financial sector, as financial market development would make up for bank credit development. We assess this argument in the cases of the United States and the eurozone. We find that since 2009, market-based finance has partially substituted for credit in both the United States and the euro zone. But it is also important to consider the cost of substituting market-based finance for bank credit. We find that the cost of market-based finance becomes very high when bank credit declines. (1) R. Levine, C. Lin, W. Xie (2015) “Spare Tire? Stock Markets, Banking Crises and Economic Recoveries” NBER Working Paper no. 20863, January A. Greenspan (1999) “Do Efficient Financial Markets Mitigate Financial Crises?” Conference of the Federal Reserve Bank of Atlanta