What Features Should an Ideal Financial System have?
Uploaded by albertgates8 on Nov 20, 2007
As we compare regions of the world in terms of their relative economic and financial power, we can definitely see some fundamental differences in the financial systems between countries that are more developed and those that are less developed. Digging deeper, we observe that countries with more advanced and efficient financial markets have three key features that make them successful. First, a successful system must be highly diversified in its ability to cater to the needs of increasingly complex and sophisticated economies. Secondly, the system must be able to provide financial services efficiently. Finally, the system must be robust enough to withstand a variety of shocks in a rapidly changing globalized economy.
Diversification allows financial markets to allocate assets and bear risks more efficiently. A broadly based financial system is likely to be more stable in times of economic downtown. We can see this during the 1997 financial crisis in Asia, where many of the countries that were not widely spread, collapsed because of their inability to manage risk. A highly diversified system involves having a wide portfolio of high-quality financial assets that cater to needs of different agents, such as equity securities, corporate-debt securities, government debt securities and bank deposits. We can see that lesser developed countries in Asia have a significantly higher proportion of bank deposits, where as more developed systems like the US and Europe are relatively spread apart evenly across the four asset groups.
A successful financial system must also be innately efficient to provide services that are of good quality, good speeds, and are competitive globally. This in turn will ensure accurate and timely information flow, responsible corporate governance and appropriate risk management. In order to achieve all of this, the financial system must be supported by an effective legal and regulatory framework as well as good accounting and auditing standards that are well-implemented and enforced. In addition, the financial system must have an efficient banking sector that caters to a wider set of consumer needs. In many lower developed countries, a large amount of households and businesses do not yet have bank accounts, and this represents a lack of trust and knowledge of the financial services industry by the general public. In order to improve this as well as improve the efficiencies of other financial assets, the financial system must reside in a place where there is a strong economy, there must also be transparent...