One of the key features of both the German and Japanese postwar political economies is a bank-based financial system. In the 1980s bank-based systems were widely perceived to be superior to market-based systems like the US and UK in their ability to provide long-term "patient" capital to industry. Since the early 1990s, however, the bank-based financial systems in both Japan and Germany have faced serious challenges, to the extent that their fundamental viability vis-à-vis market-based systems is being questioned. This paper assesses the potential paths of development for these bank-based systems and argues that change in the two countries is poorly captured by the "convergence-divergence" dichotomy. The first point made is that an examination of changes in financial systems should start with an analysis of the "societal foundations" of bank-based systems. Bank-based systems rest not just on a set of financial regulatory practices but also on the institutions and behavior of the household, corporate and public sectors as savers and investors. The second point made in this paper is that, although public policy choices are often presented in terms of a stark dichotomy between "liberal" and "non-liberal" modes of regulation (the former associated with market-based systems, the latter with bank-based systems), in fact both Germany and Japan are struggling to find a successful combination or "hybrid" of the two types of financial regulation. A third and final point is that banks play important (if diminished) roles even in market-based systems. The ultimate form that the coexistence of banks and markets will take in Japan and Germany depends on the creativity and efforts of policymakers and the banks themselves. Those interested in institutional design should try to preserve a viable banking system for SMEs and the household sector while simultaneously promoting stable capital markets for larger companies and high-tech start-ups.