From financial institutions to financial functions

July 8, 2024
by Noriyuki Morimoto

The current FSA is committed to holding the perspective of the users of financial services, i.e., the public. In other words, the role of the FSA is no longer to supervise financial institutions, but to strengthen financial functions for the interests of the public.

Now, financial function is a larger concept than financial institution. This can be said because the financial services provided by financial institutions do not encompass the entirety of financial functions. Actually, only a fraction of the financial functions used in the whole society are provided by financial institutions.

For example, the principle of transaction for the purchase and sale of a certain product is the exchange between price and object, but in the real world, it is common practice to deliver the product first and defer the payment of the price. This has the same economic effect as the seller financing the buyer during the deferral period, and we can assume that both parties are aware that they are in a financial transaction, thus factoring in the financing cost to the terms of the transaction.

Such forms of transactions have a very long history as the integration of commercial and financial exchanges. Actually, the separation of the two transactions and the independence of financial transactions led to the creation of financial institutions that specialize in finance.

One way to make finance independent is to involve a third-party moneylender from which the buyer borrows the equivalent of the price to settle the transaction in cash. Another method is to sell the seller’s claim against the buyer to a financial institution that specializes in purchasing claims. It is important to note here that the former method finances the buyer, while the latter finances the seller.

Thus, the financial function that had been contained within the commercial transaction, when made independent, resulted in two distinct forms of finance, each of which gave rise to specialized financial institutions. It is not that financial institutions came first and created financial functions, but rather that financial functions existed first, and in the process of their separation and advancement, financial institutions were created as specialized providers.

Therefore, the meaning of the transformation in financial administration is a return to the origins of finance.

 

[Category /Financial Regulations]