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 nd international financial systems contribute to the economic efficiency of their users, but their malfunction, such as the crash of 2008 can cause widespread economic damage.
The functions of the system
Financial systems:
- produce information about possible investments, and allocate capital;
- monitor investments and exert corporate governance after providing finance;
- facilitate the trading, diversification, and management of risk;
- mobilize and pool savings; and.
- ease the exchange of goods and services.
There is evidence that suggests that a well-functioning financial system contributes to economic growth [1].
The principal components of the system
The financial intermediaries
Banking
Insurance
Pensions
The financial instruments
Bonds
Mortgages
Derivatives
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
International economics
Risk Management
Systems analysis
Financial crises
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