Financial system
The financial system puts borrowers in touch with lenders and allocates risks to those who wish to take them. It is a complex interactive system, events in one component of which can have significant repercussions elsewhere. International linkages often add to its complexity by enabling developments in one country to generate consequences elsewhere. Under normal circumstances, national and international financial systems contribute to the economic efficiency of their users, but their malfunction can cause widespread economic damage.
Overview
The functioning of financial systems
A basic function of a financial system is the transfer of productive resources from those who own them but do not wish to use them, to those who wish to use them but do not own them. In the absence of that function, only a small proportion of the country's current output would be produced. A secondary function is the transfer of risk from those who wish to limit their exposure to it, to those willing to accept it for a fee. That function, also, can make a major contribution to a community's productive capacity. Various instruments are used to make those transfers - each of them a promise to do something in return. There are promises to make fixed payments (bonds); to pay dividends (equity); to provide retirement income (pensions); to bear some of the costs of accidents (insurance) - and there are promises involving other promises (derivatives).
However, willingness to undertake such transactions, except with family members and close friends, depends upon confidence that the agreements involved would not be broken - which depends in turn upon the enforcement of an effective regulatory system. Major losses of economic output tend to occur when such confidence is impaired.
The characteristics of the current financial system
The stability of the current system
The principal components of the system
The financial instruments
Bonds
Mortgages
Derivatives
The financial intermediaries
Banks
Insurance companies
Pensions providers
Finance management companies
Multi-function bodies
The financial markets
The stock exchanges
The New York Stock Exchange
The London Stock Exchange
Other stock exchanges
The bond market
The money markets
The interbank markets
The currency markets
Regulatory institutions
Banking regulators
Securities regulators
The central banks
The Federal Reserve System
The European Central Bank
The Bank of England
Other central banks
International institutions
The International Monetary Fund
The World Bank
The Bank For International Settlements
Theoretical developments
Financial economics
There is evidence that suggests that a well-functioning financial system contributes to economic growth [1].
International economics
Risk Management
Systems analysis
Financial crises
Overview: crisis categories
The crash of 1929
The crash of 2008
Other major crises
Proposals for reform
In preparation for a meeting of the world leaders in November 2008, an ebook was published by an international group of twenty leading financial economists[3]. They agreed on the need to augment IMF resources and to strengthen existing arrangements for global governance. Several of them also argued for new approaches to the regulation of large cross-border financial institutions.
Future prospects
- ↑ Ross Levin: Finance and Growth, NBER Working Paper W10766, 2004
- ↑ Barry Eichengreen and Harold James: Monetary and Financial Reform in Two Eras of Globalization, (Revised version of a paper prepared for the NBER Conference on the History of Globalization, Santa Barbara, May 2001
- ↑ What G20 leaders must do to stabilise our economy and fix the financial system, voxeu.org, Centre for Economic Policy Research November 2008