Book review. Comparing Financial Systems.

Abstract

There is a large variety of financial systems in different countries. Even if one limits oneself to the developed economies of the world, there is considerable cross-sectional heterogeneity in financial systems. Moreover, financial systems are far from static. Like biological species, they tend to evolve. And as in the case of biological species, the evolution is relatively smooth except during times of crises and stress when more dramatic forms of metamorphosis are observed. The Allen and Gale book on financial systems is an attempt to provide a coherent research perspective on the rich cross-sectional variety and intertemporal dynamics of financial systems. The term financial system is typically used to describe the collection of financial intermediaries—venture capitalists, investment banks, commercial banks, insurance companies, and so on—and stock, bond, and contingent claims (derivatives) markets that are collectively responsible for allocating resources and redistributing risks in the economy [see Thakor (1996) for an extensive discussion]. Allen and Gale actually expand on this seemingly comprehensive definition and argue that a theory of financial system design must also include a theory of the firm. That is, they make the provocative proposal that firms, rather than being viewed merely as beneficiaries of the financial system, ought to be thought of as an integral part of the financial system. This not only expands the boundaries of the research agenda on financial systems but also makes the task more challenging and exciting.