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Financial functional analysis

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发表于 2017-9-12 22:40:26 | 显示全部楼层 |阅读模式
Financial functional analysis: a conceptual framework for understanding the c...
Abstract

The financial system is currently undergoing a revolution brought about by e-finance, digital convergence, new market entrants and government-encouraged competition. New market entrants such as Apple, Alibaba, Facebook and Google come from industries such as IT, retail, social media and telecoms, and, therefore, do not fit comfortably within traditional financial institutional structures. A functional perspective might provide more practical insights into this revolution; however, the functional perspective has had a limited impact. This paper will investigate the benefits and limitations of financial functional analysis; probe the underpinning principles of sociology’s structural functional analysis; revisit Merton and Bodie’s (1995) six core financial functions in relation to new entrants in the financial landscape; and, finally, argue that in the new financial environment, functional analysis provides a more coherent and explanatory framework of the financial system for students and practitioners alike.

Keywords: financial functional analysis, functional and structural finance, functional structuralism, financial system

 楼主| 发表于 2017-9-12 22:40:52 | 显示全部楼层
1. Introduction

There is currently a revolution occurring within the financial system (Perez, 2009 Perez, C. (2009). Technological revolutions and techno-economic paradigms. Cambridge Journal of Economics, 34, 185–202.
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) brought about by new market entrants from industries such as IT (Google Wallet), telecoms (Apple, m-pesa), retail (Alibaba) and social media (Facebook). There is also the impact of e-finance (Banks, 2001 Banks, E. (2001). e-Finance: The electronic revolution in financial services. New York, NY: Wiley.
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) and, in the UK and some other countries, this change is being encouraged further by governments who are trying to increase financial competition and reduce barriers to entry (Independent Commission on Banking, 2011 Independent Commission on Banking. (2011, September). Final report recommendations. London: Author. Retrieved from
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; Office of Fair Trading, 2010 Office of Fair Trading. (2010, November). Review of barriers to entry, expansion and exit in retail banking. London: Author. Retrieved from
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). These companies now consider financial intermediation and disintermediation as part of their core offerings to customers and are challenging the incumbent banks and other financial institutions. This disruption has also resulted in governments and regulatory bodies playing catch up through the implementation of new policies/laws to enable markets to operate effectively and minimise risk to consumers and financial organisations. In effect, digital convergence is creating a nexus in which financial services have the potential to be delivered by many non-traditional organisations.

These profound changes would appear to be based not upon traditional financial institutional structures, but upon the basic functions of the financial system. This restructuring of the financial landscape and the threat to the incumbents is sharply illustrated by Bill Gates who stated: ‘Banking is essential, banks are not.’

Strategic understanding of this disruption is challenging with so many new entrants crowding into the financial market place and, therefore, it would seem appropriate to revisit Crane et al.’s (1995 Crane, D. B., Froot, K. A., Mason, S. P., André Perold, A., Merton, R. C., Bodie, Z., … Tufano, P. (1995). The global financial system, a functional perspective. Boston, MA: Harvard Business School Press.
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) The Global Financial System, a Functional Perspective and, in particular, Merton and Bodie’s (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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) chapter, ‘A conceptual framework for analysing the financial environment.’ They proposed that six core financial functions would provide a clearer perspective of the functional operations of the financial system and this financial functional perspective was endorsed by Gilbert and Scott (2001 Gilbert, E. W., & Scott, W. L. (2001). The Financial Modernization Act: New perspectives for the finance curriculum. Financial Services Review, 10, 197–208.10.1016/S1057-0810(02)00096-3
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, p. 197) who argued that: ‘Convergence under the FMA [Financial Modernization Act] mandates a functional perspective to understanding and explaining financial services.’ At the present time it is unclear how this financial restructuring will play out, but foresight in times of change is especially valuable and using this functional approach may provide insights into ‘how the financial system changes and how it is likely to evolve in the future’ (Merton & Bodie, 1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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, p. 4).

Yet, despite the apparent advantages of a financial functional perspective, there has been limited take up of this framework11. In communication with Professor Zvi Bodie and Professor Robert C. Merton, Professor Bodie commented that: ‘I do not understand why that perspective [Financial Functional Analysis] did not catch on as we had hoped.’
View all notes
and there is little detailed analysis of it. This paper will investigate the benefits and limitations of financial functional analysis; probe the underpinning principles of sociology’s structural functional analysis; revisit Merton and Bodie’s six core financial functions in relation to new entrants in the financial landscape; and, finally, argue that in the new financial environment, functional analysis and the use of functional concepts provides a more coherent and explanatory framework of the financial system for students and practitioners alike.
 楼主| 发表于 2017-9-12 22:41:10 | 显示全部楼层
2. Institutional and functional intermediation

Twenty years ago, Nobel Laureate Merton (1995b Merton, R. C. (1995b). A functional perspective of financial intermediation. Financial Management, 24, 23–41.10.2307/3665532
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) wrote an article titled, ‘A functional perspective of financial intermediation,’ and in the same year Merton and Bodie (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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) wrote a chapter entitled, ‘A conceptual framework for analysing the financial environment,’ in Crane et al.’s (1995 Crane, D. B., Froot, K. A., Mason, S. P., André Perold, A., Merton, R. C., Bodie, Z., … Tufano, P. (1995). The global financial system, a functional perspective. Boston, MA: Harvard Business School Press.
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) The Global Financial System, a Functional Perspective. These two papers represented a synthesis and extension of work by both authors (Bodie & Merton, 1992, 1993 Bodie, Z., & Merton, R. C. (1992). Pension reform and privatisation in international perspective: The case of Israel (Harvard Business School Working Paper No. 92-082). Boston, MA.
Bodie, Z., & Merton, R. C. (1993). Pension benefit guarantees in the United States: A functional analysis. In R. Schmidt (Ed.), The future of pensions in the United States (pp. 194–246). Philadelphia, PA: Pension Research Council, Wharton School of the University of Pennsylvania Press.

; Merton, 1989, 1990, 1992a, 1992b, 1993, 1994, 1995a Merton, R. C. (1989). On the application of the continuous-time theory of finance to financial intermediation and insurance. The Geneva Risk and Insurance Review, 14, 225–261.10.1057/gpp.1989.21
Merton, R. C. (1990). The financial system and economic performance. Journal of Financial Services Research, 4, 263–300.10.1007/BF00122867
Merton, R. C. (1992a). Financial innovation and economic performance. Journal of Applied Corporate Finance, 4, 12–22.10.1111/jacf.1992.4.issue-4
Merton, R. C. (1992b). Continuous-time finance. Oxford: Basil Blackwell.
Merton, R. C. (1993). Operation and regulation in financial intermediation: A functional perspective. In P. England (Ed.), Operation and regulation of financial markets (pp. 17–68). Stockholm: The Economic Council.
Merton, R. C. (1994). Influence of mathematical models in finance on practice: Past, present and future. Philosophical Transactions of the Royal Society A: Mathematical, Physical and Engineering Sciences, 347, 451–463.10.1098/rsta.1994.0055
Merton, R. C. (1995a). Financial innovation and the management and regulation of financial institutions. Journal of Banking and Finance, 19, 461–481.10.1016/0378-4266(94)00133-N

; Merton & Bodie, 1992a, 1992b, 1993 Merton, R. C., & Bodie, Z. (1992a, May). A framework for analysing the financial system (Working Paper). Boston, MA: Harvard Business School.
Merton, R. C., & Bodie, Z. (1992b). On the management of financial guarantees. Financial Management, 21, 87–109.10.2307/3665843
Merton, R. C., & Bodie, Z. (1993, June). Deposit insurance reform, a functional approach. In A. Meltzer & C. Plosser (Eds.), Carnegie-Rochester Conference Series on Public Policy (p. 38). New York, NY: Carnegie - Rochester.

) which attempted to provide a clearer overview of the financial system. They explained that there were two fundamentally different perspectives of financial intermediation, i.e. an institutional perspective and a functional perspective, and it was the latter which was more appropriate because form follows function with institutions being endogenously shaped by exogenous functions.

The institutional approach served to support the status quo and took, ‘as given…. the objective of public policy as helping the institutions currently in place to survive and flourish’ (Merton, 1995b Merton, R. C. (1995b). A functional perspective of financial intermediation. Financial Management, 24, 23–41.10.2307/3665532
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, p. 23). Institutions also possessed other benefits, e.g. they were tangible and had the potential to maintain business conduct by reducing risk taking and dominant market position abuse. Furthermore, because of financial asymmetric information, institutions acted as signalling devices to indicate the degree of risk associated with a particular type of institution (Giovannini, 2010 Giovannini, A. (2010, January). Financial system reform proposals from first principles (Policy Insight No. 45). London: Centre for Economic Policy Research. Retrieved from
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).

Using an institutional perspective to describe the financial system of banks, insurance companies, regulators, etc., however, is limited because of differences in complexity, culture, history, political factors, size and technology. Merton and Bodie (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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) also noted that institutions differed across borders and time, and that even institutions with the same name did not always represent the same thing, e.g. US banks were very different entities in 1995 compared with 1925 or with banks in Germany or the UK.

Importantly, financial regulation tied to the contemporaneous financial environment has the potential to become obsolete by new financial innovations, etc. resulting in catch-up reactive legislative. Furthermore, the legislation may fail to encompass a broader range of financial activities, e.g. pre-2008, the regulatory framework did not fully consider the shadow-banking system where OTC derivatives peaked at $683trillion in June 2008 (Bank for International Settlements, 2008 Bank for International Settlements. (2008, December). BIS quarterly review. 32. Basel: Author.
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).

In an attempt to resolve the limitations of an institutional perspective, Merton and Bodie (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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, p. 4) proposed a functional perspective which could be applied at four levels of analysis: system, institution, activity and product, and which was based upon two main premises:

•        
‘Financial functions are more stable than financial institutions – that is, functions change less over time and vary less across borders.
•        
Institutional form follows function – that is, innovation and competition among institutions ultimately result in greater efficiency in the performance of financial functions.’
In a consideration of fundamental principles, Merton (1995b Merton, R. C. (1995b). A functional perspective of financial intermediation. Financial Management, 24, 23–41.10.2307/3665532
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, p. 23) stated that: ‘The primary function of any financial system is to facilitate the allocation and deployment of economic resources, both spatially and temporally, in an uncertain environment.’ Based upon this definition of economic resource deployment Merton (1995b Merton, R. C. (1995b). A functional perspective of financial intermediation. Financial Management, 24, 23–41.10.2307/3665532
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, p. 24) and Merton and Bodie (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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, p. 5) identified six core functions which needed to be performed by a financial system:

(1)        
A ‘clearing and settling payments’ system for the exchange of goods and services.
(2)        
A ‘pooling of funds’ and subdividing of shares mechanism to enable large-scale enterprise.
(3)        
‘Transfer economic resources through time, across borders and industries.’
(4)        
Manage uncertainty and control risk.
(5)        
Price information which helps ‘coordinate decentralised decision-making in various sectors of the economy.’
(6)        
‘A way to deal with the asymmetric-information when one party to a financial transaction has information the other does not …’, ‘or when one party acts as an agent for another.’
Merton and Bodie (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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) did not clearly establish whether these functions were comprehensive and universal. For this reason, further empirical research needs to be conducted into how well they address existing financial systems and whether or not there are other functions waiting to be discovered. In addition, there is a pressing need for comparative analyses of different national financial systems to identify similarities and differences in functions.

In the mid-1990s, the financial systems of former Communist countries in eastern Europe were being restructured and Merton and Bodie (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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) maintained that a conceptual framework based upon six core financial functions would provide a more comprehensive and systematic method for institutional design. These functions were underpinned by a financial infrastructure which involved accounting and legal procedures; organisation of trading and clearing facilities; and regulatory structures. Functions are more enduring than institutions and Merton (1995b Merton, R. C. (1995b). A functional perspective of financial intermediation. Financial Management, 24, 23–41.10.2307/3665532
[Crossref], [Web of Science ®], [Google Scholar]
, p. 23) noted that the functional perspective did not suggest that operating or regulatory institutions would be preserved. In like manner, Giovannini (2010 Giovannini, A. (2010, January). Financial system reform proposals from first principles (Policy Insight No. 45). London: Centre for Economic Policy Research. Retrieved from
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, p. 5) observed that: ‘institutions are static; businesses (functions) are dynamic.’ Merton and Bodie (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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) did not provide a diagram of their functional perspective so below is an interpretation of the core functions and financial infrastructure
 楼主| 发表于 2017-9-12 22:41:25 | 显示全部楼层
The development of financial institutions may also be considered using Bain’s (1959 Bain, J. S. (1959). Industrial organisation. New York, NY: John Wiley and Sons.
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) industrial organisation paradigm of structure – conduct – performance. He proposed that market structure was influenced by environmental circumstances such as product, the extent of competition and technology. These influenced the behaviour of buyers and sellers which, in turn, affected the efficiency of a firm’s economic performance. In a study of the vast amount of literature addressing the development of financial institutions and systems among industrialised economies, Fohlin (2015 Fohlin, C. (2015). Financial systems and economic development in historical perspective. In C. Diebolt & M. Haupert (Eds.), Handbook of cliometrics (pp. 393–430). Heidelberg: Springer-Verlag.
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, p. 419) emphasised the importance of path dependency and history and commented:

These studies also demonstrate the variety of organization and design of these systems, all focused on similar functions and ultimately on mobilizing enormous amounts of capital toward productive ends … researchers should consider financial systems as an amalgamation of a set of functions rather than as a fixed typology of institutions.

In 1999, the US Congress enacted the Financial Modernization Act (FMA) which repealed previous laws preventing institutions from combining banking, securities or insurance activities and enabled the creation of ‘financial holding companies’ which operated along multifunctional lines. In an analysis of the FMA, Gilbert and Scott (2001 Gilbert, E. W., & Scott, W. L. (2001). The Financial Modernization Act: New perspectives for the finance curriculum. Financial Services Review, 10, 197–208.10.1016/S1057-0810(02)00096-3
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, p. 197) argued that: ‘Convergence under the FMA mandates a functional perspective to understanding and explaining financial services,’ and identified five benefits of a functional approach (Gilbert & Scott, 2001 Gilbert, E. W., & Scott, W. L. (2001). The Financial Modernization Act: New perspectives for the finance curriculum. Financial Services Review, 10, 197–208.10.1016/S1057-0810(02)00096-3
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, pp. 202–206) which are described below and followed by additional advantages which have been discerned from other literature:
 楼主| 发表于 2017-9-12 22:41:34 | 显示全部楼层
2.1. Describing the financial sector appropriately

The functions of payments services, securities transactions and risk underwriting were traditionally conducted through banks, securities firms and insurance companies, respectively. As a result of the FMA there was a movement away from an institutional perspective to a functional one in which a financial holding company (FHC) might provide all financial functions. Gilbert and Scott (2001 Gilbert, E. W., & Scott, W. L. (2001). The Financial Modernization Act: New perspectives for the finance curriculum. Financial Services Review, 10, 197–208.10.1016/S1057-0810(02)00096-3
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) argued that the use of a functional perspective provided a more appropriate description of what was happening in the financial sector.
 楼主| 发表于 2017-9-12 22:41:46 | 显示全部楼层
2.2. Providing a flexible pedagogy for studying the financial structure

As was explained above, the financial structure is dynamic and continually changing and therefore, ‘A functional approach, then, provides an enduring pedagogy for explaining the financial sector’ (Gilbert & Scott, 2001 Gilbert, E. W., & Scott, W. L. (2001). The Financial Modernization Act: New perspectives for the finance curriculum. Financial Services Review, 10, 197–208.10.1016/S1057-0810(02)00096-3
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, p. 204). Teaching materials do not need to be revised because the functional perspective accommodates institutional changes and, furthermore, international banking practices can be incorporated within this system.

The FMA introduced substantial structural changes and Gilbert and Scott (2001 Gilbert, E. W., & Scott, W. L. (2001). The Financial Modernization Act: New perspectives for the finance curriculum. Financial Services Review, 10, 197–208.10.1016/S1057-0810(02)00096-3
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, p. 207) argued that: ‘The curricular focus should become relevant to the new world of convergence in the financial industries.’ The convergence they were referring to was financial and many of the changes currently impacting on the financial sector are more a result of digital convergence. Fortunately, financial functional analysis is equally relevant to both.
 楼主| 发表于 2017-9-12 22:42:01 | 显示全部楼层
2.3. Explaining financial services in a value-added context

Financial functional analysis is based within existing financial theory providing an explanation of how institutions provide value through services and products. This financial intermediation adds value through reducing transaction costs, etc. Furthermore, effective management is enhanced through an understanding of the functional perspective.

2.4. Defining new financial products and services

Gilbert and Scott (2001 Gilbert, E. W., & Scott, W. L. (2001). The Financial Modernization Act: New perspectives for the finance curriculum. Financial Services Review, 10, 197–208.10.1016/S1057-0810(02)00096-3
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) described this benefit as defining new financial functions and chose to illustrate this with a description of how information technology developments influenced payments operations. In fact, different payments systems are not new ‘functions’, but different operating/delivery mechanisms and this alternative use of ‘functional’ terminology indicates how the term can lead to inaccurate and misleading application.

2.5. Identifying common elements in producing various financial services

In the past managers only required to have an understanding of narrow-specific operations, whereas now they need a broader perspective of products and markets and a financial functional perspective provides greater insights. Moreover, there is a need to organise production methods and marketing strategies for a range of activities and not just one. Gilbert and Scott (2001 Gilbert, E. W., & Scott, W. L. (2001). The Financial Modernization Act: New perspectives for the finance curriculum. Financial Services Review, 10, 197–208.10.1016/S1057-0810(02)00096-3
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, p. 206) added that: ‘A functional perspective is especially useful in educating future managers of multifunction FHCs’ [financial holding companies].
 楼主| 发表于 2017-9-12 22:42:15 | 显示全部楼层
2.6. Enhancing regulatory activities

The benefits of a financial functional perspective may also be applied to regulatory activities of which there are four basic models of regulation: functional, integrated, institutional and objectives-based (Abrams & Taylor, 2000 Abrams, R. K., & Taylor, M. W. (2000). Issues in the unification of financial sector supervision 22 (International Monetary Fund Working Paper No. WP/00/213). Washington, DC: International Monetary Fund.
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) and it is institutional and functional which are pertinent to this discussion.

Institutions have been the basis for many regulatory structures with multiple specialist regulators each having responsibility for specific types of financial institutions e.g. banks, brokerage firms and insurance companies, irrespective of the activities they might undertake. In contrast, the functional model organises regulation along ‘specific lines of business or activities’ (Awrey, 2010 Awrey, D. (2010). The FSA, integrated regulation and the curious case of OTC derivatives (July 20, 2010). University of Pennsylvania Journal of Business Law, 13, 1. Oxford Legal Studies Research Paper No. 61/2010. Retrieved from
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, p. 6). According to Schwarcz (2014 Schwarcz, S. L. (2014). Regulating financial change: A functional approach. Retrieved from
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, p. 54) there should be two goals of a functional framework for financial regulation:

To correct market failures that impair the ability of the financial system’s underlying components – its firms and markets – to engage in funding and in the risk-management, behaviour monitoring, and information-processing functions related to funding; and to protect the capacity of the financial system, as a ‘system,’ to serve as a network within which funding and its related functions can be conducted.

Naturally, a functional model alone would be insufficient to achieve effective regulation and political, institutional and social dimensions would need to be factored in.

This movement towards functional regulation was noted by Giovannini (2010 Giovannini, A. (2010, January). Financial system reform proposals from first principles (Policy Insight No. 45). London: Centre for Economic Policy Research. Retrieved from
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) who observed that the UK’s Financial Services Agency had abandoned financial institutions (i.e. entities with uniform regulation) as the basis for a regulatory framework in favour of a focus on functional regulation. Similar evolution can also be observed in other countries, e.g. South Korea’s Financial Investment Services and Capital Markets Act, 2009, licenced financial investment companies according to the business function they engage in rather than the type of institution (Lo, 2008 Lo, A. W. (2008). Hedge funds, systemic risk, and the financial crisis of 2007–2008, Written testimony of Andrew W. Lo, Prepared for the U.S. House of Representatives Committee on Oversight and Government Reform November 13, 2008 Hearing on Hedge Funds. Retrieved from
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). Lo (2008 Lo, A. W. (2008). Hedge funds, systemic risk, and the financial crisis of 2007–2008, Written testimony of Andrew W. Lo, Prepared for the U.S. House of Representatives Committee on Oversight and Government Reform November 13, 2008 Hearing on Hedge Funds. Retrieved from
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) emphasised the advantages a functional approach might bring to regulation in the USA citing the coordination challenges faced by the SEC, CFTC, OCC, OTS, Treasury and the Federal Reserve. This movement towards functional regulation would not appear complete and Awrey (2010 Awrey, D. (2010). The FSA, integrated regulation and the curious case of OTC derivatives (July 20, 2010). University of Pennsylvania Journal of Business Law, 13, 1. Oxford Legal Studies Research Paper No. 61/2010. Retrieved from
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, p. 7) conceded that he: ‘… was thwarted in his attempts to identify a single jurisdiction that employed a regulatory structure premised exclusively on either the institutional or functional approaches.’
 楼主| 发表于 2017-9-12 22:42:28 | 显示全部楼层
2.7. A diagnostic and predictive purpose

In this time of new entrants and innovative disruption (Christensen, 1997 Christensen, C. M. (1997). The innovators dilemma: When new technologies cause great firms to fail. Boston, MA: Harvard Business School Press.
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) another benefit of using this functional approach is to provide insights into ‘how the financial system changes and how it is likely to evolve in the future’ (Merton & Bodie, 1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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, p. 4). This would enable organisations to anticipate developments and prepare offensive and defensive strategies.

2.8. Consistency of terminology and approach

If there were agreement and standardisation of what is meant by ‘functions’ this would enable greater comprehension of the system and between systems operating in different countries thus enhancing oversight and regulation. Presently, there is a lack of consistency of terminology and Gilbert and Scott didn’t use Merton and Bodie’s six core functions instead they mentioned the functions of: payments services, securities transactions and risk underwriting – which are incomplete descriptions of the financial system.

2.9. Contribution to theoretical plurality

Although it has been infrequently acknowledged, economists have implicitly adopted functional arguments in economic theorising. Jackson (2002 Jackson, W. A. (2002). Functional explanation in economics: A qualified defence. Journal of Economic Methodology, 9, 169–189.10.1080/13501780110078981
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, p. 187) maintained that attempting to debar functional methods which were ‘suppressed in the mainstream’ would be impractical because functionalism ‘keeps breaking out.’ He added: ‘Rather than trying to eliminate functional ideas and then suffering the embarrassment of failing to do so, economists might be better advised to take a more tolerant view.’

Jackson (2002 Jackson, W. A. (2002). Functional explanation in economics: A qualified defence. Journal of Economic Methodology, 9, 169–189.10.1080/13501780110078981
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, p. 187) also maintained that functional methods provided several benefits to economics, i.e. ‘a cautious and pluralistic attitude to causality, an awareness of stratification and emergence, and a compatibility with realist social science.’ Explanatory theory might use functional approaches to provide a causal explanation of the operation and reproduction of the economic system and how it connects with individuals in society.
 楼主| 发表于 2017-9-12 22:42:42 | 显示全部楼层
2.10. Providing a basis for financial reform

The financial functional perspective provides a conceptual framework to assist countries as they modernise and reform their financial systems. Merton and Bodie (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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) proposed that this functional ‘anchor’ would assist the reform of the financial systems of the former Communist countries of east Europe.

In spite of the benefits listed above there has been a marked lack of adoption of the functional perspective. A clear exception to this view is the classical description of money as being a unit of account, a medium of exchange and a store of value (Mankiw, 2007 Mankiw, N. G. (2007). Macroeconomics (6th ed.). New York, NY: Worth.
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) applied the six core functions to the pensions industry and pension funds were noted to have fulfilled a number of the financial functions sometimes more effectively than other more dedicated institutions (Davis, 2000 Davis, E. P. (2000). Pension funds, financial intermediation and the new financial landscape. The Pensions Institute, Cass Business School Discussion Paper PI-0010. Retrieved from
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). Merton and Bodie (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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, p. 4) also compared their six core functions with other writers using functional frameworks, i.e. Sanford (1993 Sanford, C. S. (1993, August). Financial markets in 2020. Kansas, MO: Federal Reserve Bank of Kansas City Economic Symposium.
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); Hubbard (1994 Hubbard, R. G. (1994). Money, the financial system, and the economy. Reading, MA: Addison-Wesley.
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); Kohn (1994 Kohn, M. (1994). Financial institutions and markets. New York, NY: McGraw-Hill.
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); and Rose (1994 Rose, P. S. (1994). Money and capital markets. Burr Ridge, IL: Irwin.
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) and identified a number of other writers ‘whose work fits comfortably within this framework’, e.g. Black (1985 Black, F. (1985). The future of financial services. In R. P. Inman (Ed.), Managing the service economy (pp. 222–230). Cambridge: Cambridge University Press. Chapter 8.
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). Macey (1996 Macey, J. R. (1996). Derivative instruments: Lessons for the regulatory state. Faculty Scholarship Series, Paper, 1446, 69–93.
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) used Merton and Bodie’s (1995 Merton, R., & Bodie, Z. (1995). A conceptual framework for analyzing the financial environment. In D. B. Crane, K. A. Froot, S. P. Mason, A. Perold, R. C. Merton, Z. Bodie, … P. Tufano (Eds.), The global financial system, a functional perspective (pp. 3–31). Boston, MA: Harvard Business School Press.
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) functional approach for derivatives analysis; yet, few others have explicitly used the functional perspective and none, to our knowledge, with systematic use of the six core functions.
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