Comparative financial system

Author: Franklin Allen
Publisher:
Publish Date: 2003-03-01
Features: In modern economies, the financial system is key to resource allocation. The financial system channels household savings into the corporate sector and allocates investment funds among firms. It can also smooth consumption and expenditures across time for households and firms, and it enables firms and households to share risks. These functions are common to financial systems in most developed countries. However, these financial system models are widely diverse. In the U.S. and the U.K., competitive markets dominate the financial sector, whereas in France, Germany, and Japan, banks have traditionally played a significant role. Why are the differences in financial systems across countries so vast? Do different financial systems merely represent alternative ways of meeting similar needs? Is the current trend toward market-based systems desirable? Franklin Allen and Douglas Gale argue that the view holding market-dominated financial systems to be the best is overly simplistic and requires more nuanced analysis. For example, financial markets may be poor at sharing risks; bank competition may be inefficient; financial crises are a mixed bag; and the separation of ownership and control is actually optimal. Financial institutions are not just a veil; obscuring the allocation mechanism does not affect it, but overcoming market incompleteness depends on them. An optimal financial system relies on both financial markets and financial intermediaries. This book covers: building platforms, the contrast between competition and insurance, the role of firms, and markets and intermediaries.