This book is a theoretical survey of financial system activity illustrated with the way the theory applies in practice. The theoretical sections outline the economic principles underlying the organization of financial systems and show how a system’s component institutions and markets complement each other. The applications sections illustrate how the principles affect financial transactions as well as the institutions and markets that carry them out.
It is argued here that financial markets and institutions with differing capabilities are aligned against groups of transactions with differing attribute combinations in a process that aims to achieve cost-effective forms of financial governance. The alignments within a financial system evolve over time. The book identifies the forces driving change and illustrates how they do so. Especially, the book focuses on why financial system organization has been changing so rapidly since the beginning of the 1970s and how those changes present the analyst with profit opportunities.
The focus on principles permits a more integrated analysis and a more concise description of financial systems than is found in other texts. For example, many texts describing financial activities do not analyze how markets and intermediaries complement each other. Yet complementarity is one of the financial system’s main organizing principles, and by recognizing the interactions between different parts of the system, we can solve such puzzles as: