Financial economics

Financial economics treats the financial system as an open interactive system dealing both in claims upon future goods and services, and in the allocation of the risks that are associated with such claims.

(See the related articles subpage for definitions of the terms shown in italics in this article)

Financial systems

Common features

Financial systems vary, but most have the common features that are assumed to be in place for the purposes of this article. The essential functions of a financial system are taken to be both to connect prospective investors with investment opportunities, and to allocate risk in accordance with the preferences of prospective risk-takers. Its components are taken be corporations, investors, financial intermediaries and a financial regulator; its instruments are taken to include a variety of types of shareholding, debt instruments and options that are traded in a variety of financial markets; and its activities are taken to be governed by rules and practices administered by regulatory authorities. The financial activities of governments are the subject of a separate article on public finance.

Effects on economic performance

The evidence strongly suggests that a well-developed financial system is good for economic growth, and although comparisons between systems in which companies get outside finance mainly by borrowing from the banks (as is said to happen in Germany and Japan) with equity-based systems in which companies get it mainly by issuing shares (as in the United States and Britain) have been inconclusive, they suggest that equity-based system are better for promoting hi-tech growth.