ABSTRACT
This chapter describes how a typical financial system is organised, and explains why this organisational form evolves. First, the chapter examines the parties to a typical financial deal and the objectives they strive to achieve. Next, the chapter contends that different deals can be regarded as presenting varying combinations of a few important attributes. The chapter then describes three principal types of governance mechanisms. Each mechanism can be used to administer financial deals, but each has its own distinctive capabilities that render it more or less well suited to governing deals of a particular type. The principal governance task faced by financiers is to determine which mix of governance capabilities can be used most effectively, given a deal’s particular attributes. Finding this mix is described as alignment of deal attributes with governance capabilities. Finally, the chapter shows that a financial system’s organisation at a point in time results from these cost-effective alignments. Over time, cost-effective forms of governance can change as the economics of doing deals changes.
