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The paper proposes a framework for examining the process of financial market development. The framework, consistent with the functional view of financial system design, is anchored in studying the incentives facing the key players in financial markets-borrowers, lenders, liquidity providers, and regulators-whose actions determine whether and how markets develop. While different financial instruments embody different concessions by borrowers and lenders, the framework emphasizes the two main compromises: the tradeoffs between maturity and collateral, and between seniority and control. The framework is used to analyze the sequencing of financial market development.

Finance --- Business & Economics --- Finance - General --- Banks and banking. --- Capital market. --- Financial instruments. --- Foreign exchange market. --- Exchange market --- Foreign exchange markets --- FX market --- Capital instruments --- Financial instruments --- Capital markets --- Market, Capital --- Agricultural banks --- Banking --- Banking industry --- Commercial banks --- Depository institutions --- Law and legislation --- Markets --- Legal instruments --- Negotiable instruments --- Financial institutions --- Loans --- Money market --- Securities --- Crowding out (Economics) --- Efficient market theory --- Money --- Finance: General --- Investments: General --- Investments: Bonds --- Economic Development: Financial Markets --- Saving and Capital Investment --- Corporate Finance and Governance --- General Financial Markets: General (includes Measurement and Data) --- General Financial Markets: Government Policy and Regulation --- Institutions: Design, Formation, and Operations --- Asymmetric and Private Information --- Current Heterodox Approaches: Institutional --- Evolutionary --- Financial Markets and the Macroeconomy --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Investment & securities --- Securities markets --- Financial sector development --- Bonds --- Financial markets --- Capital market --- Financial services industry --- United States