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Financial infrastructure and corporate governance

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  • Helen Allen
  • Grigoria Christodoulou
  • Stephen Millard

Abstract

An essential part of the financial system is its infrastructure: for example, payment systems, securities settlement systems, central counterparties and messaging services. These enable transactions ranging from retail payments through to business in domestic and international wholesale financial markets. Given this, were any such system to fail, this could affect the whole economy. This threat to financial stability largely explains why central banks seek to ensure – via their ‘oversight’ role – that financial infrastructures take sufficient measures to mitigate risk. This paper explores the role of governance of infrastructures in the management of systemic risk. We do this by considering the case of a generic infrastructure provider operating under different forms of ownership. We show that, in the presence of consumption externalities, the level of risk mitigation chosen by the infrastructure provider is less than socially optimal. We then show that governance may have a role in adapting a provider’s decision-making process to take due account of their risk externalities and, hence, provide a more socially optimal level of risk mitigation. Specifically, we suggest a feasible adaptation could be for infrastructures to appoint external stakeholder representatives to their boards with a specific remit to act in the wider public interest.

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Bibliographic Info

Paper provided by Bank of England in its series Bank of England working papers with number 316.

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Date of creation: Dec 2006
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Handle: RePEc:boe:boeewp:316

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  1. Hart, Oliver & Moore, John, 1996. "The Governance of Exchanges: Members' Cooperatives versus Outside Ownership," Oxford Review of Economic Policy, Oxford University Press, vol. 12(4), pages 53-69, Winter.
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  5. Nicholas Economides, 1997. "The Economics of Networks," Brazilian Electronic Journal of Economics, Department of Economics, Universidade Federal de Pernambuco, vol. 1(0), December.
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  7. Vernon, John M & Graham, Daniel A, 1971. "Profitability of Monopolization by Vertical Integration," Journal of Political Economy, University of Chicago Press, vol. 79(4), pages 924-25, July-Aug..
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