Financial Systems

Businesses seeking capital to finance current operations and growth must tap into available “financial systems,” which develop locally, nationally and even globally to facilitate channeling of funds from agents with surpluses to agents with deficits. Researchers looking to analyze and compare financial systems have generally paid attention to how agents (i.e., those with funds surpluses and deficits) interact directly with one another through financial markets and to identifying the role of various financial intermediaries such as banks and insurance companies. Recently, non-bank intermediaries such as pension and mutual funds had gradually become significant players in corporate ownership, which means that the analysis of financial systems of developed countries need to consider these non-bank financial institutions that not only intermediated between households and markets but also between firms and markets. Another important player in any financial system is, of course, the government. Governments play a variety of roles in the financial system. For example, governments are both borrowers and savers: borrowers in times when funds are needed to fight wars, overcome recessions or underwrite major investment projects; and savers when state-owned assets, such as natural resources like oil, generate significant amounts of money that the state can set aside and hold on behalf of the citizens of the country. Other important roles for the government in the financial system include setting and conducting monetary policy and regulating banks and other financial intermediaries (e.g., insurance companies). The type and scope of regulation is determined by a variety of influences including still another important institutional factor in the financial system: the political system that determines the structure of the government and its policies. When considering the financial system in each country consideration must also be given to the legal system, notably the law surrounding formation and enforcement of contracts, property rights, corporate governance mechanisms and terms and restrictions of securities. In addition, the exchange of capital that occurs in any financial system requires agreement on accounting systems and standards and disclosure rules and norms that facilitate transfer of information by those in need of capital to those willing to provide capital to allow the capital providers to make informed decisions about whether to invest or lend. Finally, the quality and performance of a financial system is influenced by the availability of skilled human capital including lawyers, accountants, commercial bankers, investment bankers and economists