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This paper contributes to the literature by looking at the possible relevance of the structure of the financial system—whether financial intermediation is performed through banks or through markets—for macroeconomic volatility, against the backdrop of increased policy attention on strengthening resilience. Since low-income countries (LICs) are the most vulnerable to large and frequent terms of trade shocks, this paper focuses on a sample of 38 LICs over the period 1978–2012. It finds that banking sector development acts as a shock absorber in poor countries, dampening the transmission of terms of trade shocks to growth volatility. Expanding the sample to 121 developing countries confirms this result, although the role of shock absorber reduces as economies grow richer. By contrast, for most economies, stock market development appears neither to be a shock absorber nor a shock amplifier. These findings are consistent across a range of econometric estimators, including fixed effects, system GMM, and local projection estimates.JEL Codes: F40, G20, O10.