Financial markets and institutions arise to mitigate the effects of information and
transaction costs that prevent direct pooling and investment of society’s savings.2 While
some theoretical models stress the importance of different institutional forms financial
systems can take, more important are the underlying functions that they perform (Levine,
1997 and 2000; Merton and Bodie, 2004). Financial systems help mobilize and pool
savings, provide payments services that facilitate the exchange of goods and services,
produce and process information about investors and investment projects to enable
efficient allocation of funds, monitor investments and exert corporate governance after
these funds are allocated, and help diversify, transform and manage risk.
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