Financial systems around the globe - Essay Example

? It is generally observed that financial systems around the globe perform similar functions, yet when we examine them closely we find that how and what they contribute in their growth-inducing role is markedly different. Evaluate and discuss this statement. Name: Course No: Course Name: Instructor’s Name: Date: Financial Growth According to the conventional theories of financial intermediation, the intimidation stands on the transaction cost and requires use of full information. They are considered to do work by taking deposits and issue the insurance policy, which is the method to provide finance to a company. Nowadays, there is a considerable change in these methods as the concepts of transaction cost and use of full information are removed and intimidation has increased in today’s financial market. It’s difficult to bring these changes with the traditional method of financing growth. There is also a tendency in the direction of cross border merger and acquisitions among great financial service firms in diverse nations. These cross border merger and acquisitions frequently engage big universal sort of institutions that give numerous types of financial services to multiple nations. There are two basic methods, which are used nowadays, which are bank intermediation based method and market based financial system (Leyland and Pyle 1977). We know that there is a diversification of financial systems in different countries. Most of these countries have bank intermediations and market based financial systems but the importance of these systems is comparatively different from each other. United States has “market based financial system”. The financial market has an important role in the financial environment of the country and the banks’ intimidation is insignificant (Leviene 2002). Germany has “bank intimidation based” financial market. In such financial environment, banks control the allocation of credit and financial markets are not as important as in US. Besides this is confirmed that the financial systems vary from one another according to different countries and due to this, the financial growth rate is also different for each country according to their selection of the financial system. Different countries select different financial systems because every financial system provides unique functions that are meritorious, and due to the difference in the functions the financial growth of a country also varies (Allen and Santomero 1997). Worldwide or global banking is a substituted method to a stock market to share the risk, collect information for providing the guidance to generate the information and to match corporate governance of different countries. Here, we have discussed about Germany, where the size of the stock market is small & banks carry the entire risk related to the equity, right of proxy regarding the other’s shares. On other hand, banks are working as the representatives to manage the affairs such as to borrow loan and other corporate activities. The thing, which needs to be examined is whether the bank is working as the substitute of the stock market or it has the information about the dealings of the firms, if banks are working as the substitutes of the stock market then the performance of the firms should improve but if they have some kind of private information regarding the firms then they may be a part of conflicts of firms with the equity holders and with those who voted in proxy through banks. It investigates through the facts and figures that the banks influence the performance of German firms and the rest of conflicts arise because of it (Gorton and Schmid 2000). Banks and other financial intermediaries are the basis of outsourcing to the firms. Intermediaries supply more than 50 percent of outsource funds from the countries that are United States, Japan, the United Kingdom, Germany, and France. The investors primarily borrow money as a loan through the banks and they do not directly borrow the loan. Diamond gives a model of Financial Intermediation and Delegated Monitoring in which, he elaborates the answers to the questions such as why the investors borrow loan through banks? What is the financial strategy of banks due to which, they serve to investors as an agent? The results of the Diamond’s model elaborate main functions of the debt contract with the bank and the significance of diversification within the financial intermediaries (Hanazaki and Horiuchi 2000). The structure can be used to appreciate the organizational form of intermediaries, the function of banks in capital arrangement, and the effects of rules that maximize bank diversification. Financial intermediaries are a negotiator, or groups of negotiators, who hand over the responsibility to invest in financial resources. In particular, they allot securities in order to buy other securities. The main step in accepting intermediaries is to explain the characteristics of the financial markets where they play a significant role and underline what permits them to supply valuable services. It is essential to realize the financial contracts written by intermediaries in order to analyze as how the contracts are differentiated from those who are not engaged in an intimidating, and why these are reasonable financial contracts (Diamond 1996). The debt contracts are the main source to understand the intimidation. The cost of examining and implementing the debt contracts which are issued openly to the investors become a reason that increase finance through an intermediary that can be advanced. Debt contracts involve the contracts given to the intermediaries when they borrow the money from bank and the contract given by the intermediaries when they borrow loan from investors. Portfolio diversification within the financial intermediaries is the financial technology that leads a bank to the transformation of loans, which needs valuable supervision and checking into bank deposits. There is a continuous-time model of liquidity conditioned by banks, in which customers can drop and extract their money and finance intentionally. This intentional submission and withdrawal choice of the customers establishes a profitable and compatible solution to the problem of designing deposit contracts into unusual, irregular, substandard and non-convex form. This model provides explanation, solution and method for resolving the problem and demonstrates, in this more common framework, the approaches which are achievable as compared to the conventional methods. Mergers and acquisitions between extremely large financial institutions are appropriate for further expansion in markets throughout the world. They pull the attention of the policy makers, researchers, and the financial press and frequently reorganize the position of the world's major financial services firms (Thaddon 2002). There is also a tendency of cross border merger and acquisitions among large financial service firms in diverse nations. These cross border merger and acquisitions frequently engage big universal sort of institutions that give numerous types of financial services to many nations all over the world. In Europe, there is a significant consolidation of all types of financial institutions that increases their market value. Also the mergers and acquisitions that are cross bordered and take place in Europe are able to connect not only the firms but also the nations. They become better mergers and acquisitions as compared to nationwide mergers and acquisitions. They surpass other financial institutions working in local mergers or in affiliation with national firms (Kolari, et al 1988). In this paper, we discussed the financial systems and also, how we can select these systems which are appropriate for the functions of an organization. In the start, we have to collect the information regarding the factors which may affect the performance of an organization like the marketing’s ups & downs or the competition, management strategies and other related issues for the management and the relationship of organization with the Government. Secondly, the things which need to be focused are according to different countries as the financial system for every country is different and is relevant to the market situation of the country. While selecting the suitable financial system, information regarding each of the system must be obtained and examined then to be applied as per the results for the situation of an organization. The two main methods already mentioned before are market based financial system and bank based financial system. Organizations use the one that is better for achieving the growth purpose (Fama 1980). It is clear that the development of an organization is dependent upon its consistent growth and market sustainability and to achieve and maintain the growth, choice of an efficient financial system is necessary whether it is bank based financial system or market based financial system. A reasonable and effective financial system model leads the growth of an organization as well as helps fully for getting the desired goals and objectives. (Gorton and Schmid 2000). Most probably the increase in consolidation is because of the market reaction in response to the deregulation in the United States and the particular Market Program in the European Union (EU). The change in the policy by the government and market reaction may add a sudden extra consolidation of some big organizations too. According to Diamond (1996), the change in policy may lead to global risks for large organizations and monetary policy also needs to be looked at along with protection measures. If we compare market based and bank based financial system, the market based financial system works better as it provides motivation to the management of an organization to bring innovations in the organization. The competition which exists in the market motivates the management to maintain better organizational structure as well as long term growth, the market based financial system provides financial services, most appropriate risk management strategy and brings most creative work as compared to bank based system (Santomero 1989). This observation reduces the effectiveness of bank based approach. This may give a finance analysis through which the appropriate financial services are observed and done and legal activities are there to achieve and maintain the financial development. As a result, it leads to the financial position authorized system which enhances the financial growth for a long term period. (Leviene 2002) This paper elaborate the performance of the financial system around the globe in context of the bank based financial system or bank intermediation and market based financial system; find their contribution in the financial growth. In this study the role and performance of the bank in financial systems also measured, it also explain the factors which are in relation with the financial growth like allocation of the resources, by adopting the merger and acquisition policies banks improve their financial conditions, they are working as an agent then an investor want to borrow loan they borrow on the banks behalf (Allen and Santomero 1997). Most of these countries have bank intermediations and market based financial system but the importance of these systems is comparatively different from each other. As well as this paper explain the relation between bank based financial system and market based financial system through an comparison and make a judgment that which one method of both bank based financial system and market based financial system consider more beneficial in the financial growth (Thakor 1996). Conclusion This paper elaborates the role of financial systems for the purpose of getting organizational goals for different organizations in different countries. The two basic systems like bank based financial system and market based financial system are normally used in the organizations all over the world. An elaboration of performance of financial systems and their contribution in enabling the organizations to have financial growth or long term goals can be found in the paper. This study also analyzes the roles and performance of the bank and market in the financial systems and the factors, which help to achieve the financial growth. This paper also examines that the functions and operations of the financial systems are not similar for the entire world and it depends upon the organizational structure, rules and regulation of the countries, relationship of the organization and Government and the system which is compatible for the financial situation of the organization to achieve the growth and long term financial development. The facts show that the financial development of an organization is related to the economic and financial position of that organization. The basic focus of this study is on the growth and development of an organization and for the purpose of achieving that, the financial system selection, the critical evaluation of the available systems and the suitability of the system for the organization should be monitored. Bibliography Allen, F. and Santomero, A (1997). The Theory of Financial Intermediation. Journal of Banking & Finance.Vol 21, Issues 11–12, Pages 1461–1485. Diamond, Douglas W (1996). Financial Intermediation as Delegated Monitoring: A Simple Example. Federal Reserve Bank of Richmond Economic Quarterly. Vol. 82(3). 51-66. Fama, E (1980). Banking in the theory of finance, Journal of monetary economics 6, 39-58. Gorton, G. and F. Schmid (2000). Universal Banking and the Performance of German Firms, Journal of Financial Economics 58, 29-80. Hanazaki, M. and Horiuchi A (2000). Is Japan's financial system Efficient? Oxford Review of economic policy,16 (2). Kolari, J., Mahajan, A. and Saunders Edward M (1988). The effect of changes in reserve requirements on bank stock prices. Journal of Banking & Finance.Vol 12, Issue 2, Pages 183–198. Leviene, R (2002). 'Bank-based or Market-Based financial systems: which is better?' Journal of Financial Intermediation, 11, 398-428. Leyland, H. and Pyle, D (1977). Information asymmetries, financial structure and financial intermediation, Journal of Finance 34, 97-112. Santomero, A. (1989). The changing structure of financial institutions: Review Essay', Journal of monetary Economics 4(5), 1-14. Thadden, Ernst-Ludwig von (2002). An incentive problem in the dynamic theory of banking. Journal of Mathematical Economics. Vol. 38, Issues 1–2, Pages 271–292. Thakor, A. (1996). The Design Of Financial Systems: An Overview, Journal of Banking and Finance 20,917-048. Read More