This book considers two kinds of financial markets: universal banking markets such as Germany and Japan where banks own equity shares, and where financing is dependent on long-term relations and cross-ownerships between borrowers and lenders, and arm's-length financial markets, where stock markets are largely independent of banks and where market prices, rather than long-term relations, determine financing (sometimes called "capital market"). The latter system prevails in the United States (US) and United Kingdom (UK). Although in Japan large securities firms do exist, and bank ownership of equities is limited pursuant to US influenced legislation, relational financing predominates over arm's-lengths financing.
In capital market countries, many shareholders may hold shares as part of an index, the securities markets are liquid, and consumer credit is plentiful. In universal banking market countries where there is bank ownership and control of industrial companies, where control is exerted because of bank domination of securities markets, there tends to be less financial innovation and less access to consumer credit.
Until the Insider Trading Directive of the European Economic Community (EEC) and the recent changes in Japan and Japanese attitudes toward capital markets, insider trading was commonplace in the day-to- day business in Japan and Germany. Securities laws, as Americans understand them, and the awesome authority of the Securities and Exchange Commission (SEC) are unknown in the European heritage. The United Kingdom, which has always entertained a system far closer to that of the United States in terms of its separation of securities and banking, enacted sweeping legislation only in the 1980s; stock markets were deregulated and banks allowed to enter into the securities market, primarily through subsidiaries. The reforms culminated in the Financial Services Act of 1986. A regulatory framework similar to that created in the United States during