Financial System Governance
Although all financial transactions require governance, this book focuses on two main types—transactions aimed primarily at raising funds, and those aimed primarily at managing risks. Both types are referred to generically as deals. (In practice, deals often combine fund raising and risk management, but for discussion purposes it helps to distinguish the two.) Appropriate governance capabilities are particularly important to securing deals’ expected profits. If funds are being raised, financiers commit resources over time and must subsequently recover the funds, with interest commensurate to the risk involved, if the financiers are to prosper. Similarly, financiers entering risk management deals must price and govern the risks appropriately. Deals that are well governed can be expected on average to reward financiers for assuming risks, while ineffectively governed deals have substantially greater probabilities of making losses.
The mechanisms for governing deals are variations of market, intermediary, and internal arrangements. Cost-effective alignments of deals and mechanisms depend on both particular deal attributes and particular governance capabilities. While each alignment of a deal and a mechanism is likely to have some distinctive features, financial system analysis is simplified by recognizing that deals can be grouped according to their combinations of attributes, and the economics of governance usually leads financiers to select ...