International Finance and Accounting Handbook

and suggest how the microeconomics of financial intermediation work. These can
have an enormous impact on the industrial structure of the financial services indus-
try and on individual firms. Sequentially, financial channels that exhibit greater
static and dynamic efficiency have supplanted less efficient ones. Competitive dis-
tortions can retard this process, but they usually extract significant economic costs
and at the same time divert financial flows into other venues, either domestically or
elsewhere.
Section 2.3 described the specific financial activities that have become most heav-
ily globalized, notably the “wholesale” end of the financial spectrum that links end
users through increasingly seamless global financial market structures.
Finally, Section 2.4 examines the consequences of this process in terms of finan-
cial sector reconfiguration, both within and between the four major segments of the
industry (commercial banking, securities and investment banking, insurance, and
asset management) as well as within and between national financial systems.

2.2 A STYLIZED PROCESS OF FINANCIAL INTERMEDIATION. The central compo-
nent of any model of a modern financial system is the nature of the conduits through
which the financial assets of the ultimate savers flow through to the liabilities of the
ultimate users of finance, both within and between national economies. This involves
alternative and competing modes of financial intermediation, or “contracting,” be-
tween counterparties in financial transactions.
A guide to thinking about financial contracting and the role of financial institutions
and markets is summarized in Exhibit 2.1. The exhibit depicts the financial process
(flow-of-funds) among the different sectors of the economy in terms of underlying

2 • 2 GLOBALIZATION OF THE FINANCIAL SERVICES INDUSTRY

Exhibit 2.1. Intermediation Dynamics.

INFORMATION ENVIRONMENTAL DRIVERS

INFRASTRUCTURE:

Market Data

Research

Ratings

Diagnostics

Compliance

TRANSACTIONS

INFRASTRUCTURE:

Payments

Exchange

Clearance

Settlement

Custody

Information Advantages

Interpretation Advantages

Transaction cost Advantages

Risk Transformation (Swaps, Forwards, Futures, Options)

Brokerage & Trading

Proprietary / Client-Driven

Securities

Broker/Dealers (B)

Banks and Credit Inst. (A)

Direct-connect

Linkages (C)

Origination Distribution

Securities

New Issues

Loans &

Advances

Securities

Investments

Deposits &

Certificates

USERS OF FUNDS

Households

Corporates

Governments

SOURCES OF FUNDS

Households

Corporates

Governments

Collective

Investment

Vehicles