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New Research: The Scope of Financial Institutions

My current research at Stanford is focused on the pros and cons; constraints and drivers; and principles and policies of in-house asset management at institutional investors. Here's the first working paper...

In general terms, my academic research is focused on how institutional investors are organized, how they coordinate their activities, and how they intersect with the market for financial services. Why do I find this so interesting? Because these investors, today, underwrite the welfare of so much of our society’s most valuable institutions – pensions, schools, charities, families, foundations, and even governments rely on institutional investors for their financial wellbeing. So it’s crucial that these organizations function effectively: that they achieve their objectives over the long-term.

Anyway, with this in mind, one of my current research projects at Stanford is focused on the pros and cons, constraints and drivers, and principles and policies of in-house asset management at institutional investors. And, as part of this project, frequent co-author Gordon Clark and I have recently completed a draft working paper that outlines some of the theoretical foundations of internal asset management. The paper is entitled “The Scope of Financial Institutions: In-Sourcing, Outsourcing, and Off-Shoring.” At issue in this paper is the degree to which institutional investors internalize the tasks and functions necessary to be effective investors. Here’s a blurb:

“... we explain the nature of the governance problem in large and small financial institutions. Likewise, we explain how and why those that produce financial returns have distinctive claims for compensation and advantage in their own right. On this basis, utilising our characterisation of the strategic assets of financial institutions, we explain the logic behind in-sourcing and outsourcing and, ultimately, the geographical reach of financial institutions. Whereas the logic behind in-sourcing and outsourcing may be familiar, we suggest that offshoring or the geographical reach of financial institutions is intimately related to their location in the global hierarchy of financial centres. Indeed, quite unlike conventional models of the firm, which treat the market for services as ubiquitous, in our formulation it matters a great deal where financial institutions are located relative to national and global financial centres.”

Caveat lector: It’s quite a conceptual paper. But (!) it does have lots of practical relevance beyond the academy. For example, here’s some stuff that’s probably of interest to everybody:

“ depends upon (1) being able to allocate resources to a select number of functions which can meet or better the costs-of-provision of those same tasks and functions in the market for financial services. In-sourcing also depends upon (2) being able to recruit the requisite human capital to realise the performance objectives of those functions in relation to the overarching strategic asset allocation framework. And finally, (3) in-sourcing depends upon a governance budget consistent with those functions complemented by an appropriate system of information infrastructure for facilitating institution-wide oversight and control. Investment in human capital and infrastructure is consistent with ensuring the long-term sustainability of in-sourcing policies.”

Anyway, I hope you enjoy the paper. (Or, if you’re like me, the introduction...then the conclusion...then the bibliography...potentially, if the paper looks really good, the sections in the middle...and the charts at the back.)

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