Modern Financial Systems: Theory and Applications

CHAPTER 1

Introduction

After introducing the book’s aims and approach, this chapter stresses the importance of financial system analysis. Financial and economic activities are mutually interrelated, with the consequence that financial activity can affect the rate of economic growth, the types of projects funded, and the well-being of economic agents. The chapter argues further that, while financial systems exhibit wide-ranging differences in appearance, their structure and activities have greater commonality than is customarily realized. Indeed, the apparent complexity and uniqueness of financial system organization can be explained in terms of a relatively small number of concepts. First, all financial systems perform the same, relatively small set of functions, and differ mainly in the ways the functions are organized within financial firms and financial markets. Second, transactions differ in the combinations of attributes¹ they present, but the taxonomy of attributes is essentially fixed and the attributes themselves relatively few in number. Similarly, the governance methods used in firms and in markets differ in the combinations of capabilities they exercise, but the taxonomy of capabilities is also fixed and the capabilities are few in number. Finally, the alignments of attributes and capabilities can also be classified using only a small number of principal categories.

This book explains how financial systems are organized, why they assume those forms, and why the systems ...