Financial System

8 Key excerpts on "Financial System"

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  eBook - ePub

  Non-Knowledge Risk and Bank-Company Management

  The Role of Intangibles in Rating Models

  • Vincenzo Formisano(Author)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  1 The Context: The Financial System

  1.1   The viable Financial System

  The functioning of the Financial System, given the nature of the activity, takes place in a context of rules and controls. The raison d’être of the Financial System is linked to the performance of certain functions that are critical, due to the way a modern economy of monetary exchange runs. These functions satisfy the specific needs of the economic system, thus allowing the development of production and distribution processes.

  The Financial System realizes, through the production and supply of financial services, three fundamental processes of the functioning of a modern economy: 1.  Regulation of trade. 2.  The accumulation of savings and investment financing. 3.  Risk management. A system which bases its functionality on the specialization and diversity of positions must have highly developed and efficient mechanisms for exchange and regulation of trade.

  One of the factors behind the functionality of trade is the system of payments, and therefore the adequacy of monetary tools through which commercial transactions can be adjusted. One can understand the progress which has been possible, moving from a barter economy to a monetary one in which money is accepted as currency trading.

  Currency trading is able to measure the value of goods traded and is widely accepted as a settlement of a transaction. The theme of this evolution has been the search for new means of payment that can reduce transaction costs and make balancing less risky.

  The accumulation and allocation of savings constitute two fundamental aspects of the Financial System. They assume that the system creates the most favorable conditions in order to make correct decisions (Barile, 2009b), pertaining to:

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  Financial Institutions

  Markets and Money

  • David S. Kidwell, David W. Blackwell, David A. Whidbee, Richard W. Sias(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  The most powerful institutional player in the Financial System is the Federal Reserve System (called the Fed). Its powers come from the Fed’s role as the country’s central bank—the institution that controls the nation’s money supply. The Fed’s primary responsibility is to stabilize the economy by conducting monetary policy by managing the money supply and interest rates. Finally, the Financial System is of great interest to politicians and government officials. Its health has a major impact on our economic well‐being. The collapse of the Financial System can be the harbinger of a recession or worse. For example, the 2008 financial crisis and near collapse of the global Financial System resulted in the most severe economic recession since the Great Depression of the 1930s. This book is your road map to understanding the Financial System and the many financial issues that will affect your personal and professional life. ■ William Whitehurst/Getty Images The Financial System is like a huge money maze—funds flow to borrowers from lenders through many different routes at warp speed. The larger and more efficient the flow, the greater the economic output and welfare of the economy. 1.1 THE Financial System The Financial System consists of financial markets and financial institutions. Financial markets are just like any market you have seen before, where people buy and sell different types of goods and haggle over prices. Financial markets can be informal, such as a flea market in your community, or highly organized, such as the gold markets in London or Zurich. The only difference is that in financial markets, people buy and sell financial instruments such as stocks, bonds, and futures contracts rather than pots and pans. Financial market transactions can involve huge dollar amounts and can be incredibly risky. The dramatic changes in for- tunes that occur from time to time because of large price swings make financial markets newsworthy.

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  Applied Intermediate Macroeconomics

  • Kevin D. Hoover(Author)
  • 2011(Publication Date)
  • Cambridge University Press

    (Publisher)

  Part IV Financial Markets 6 The Financial System Money, which represents the prose of life, and which is hardly spoken of in parlors without an apology, is, in its effects and laws, as beautiful as roses. Ralph Waldo Emerson The first thing that comes to mind when most people think about the economy (or economics) is money: whence it comes, whither it goes. Probably no aspect of macroeconomics is more in the news than the Financial System. We are deluged with daily reports of the state of the stock market, endless analyses of the Fed-eral Reserve’s monetary policy, speculations about expansions and consolidations among giant financial corporations, and stories about the financial solvency of for-eign and local governments or industrial corporations. In this chapter, we examine the Financial System’s role in coordinating economic decisions and linking aggregate supply and aggregate demand. In the next chapter, we concentrate on the behavior of interest rates. 6.1 The Financial System and the Real Economy 6.1.1 The Role of Money and Finance Money and financial assets are not direct sources of economic welfare. We cannot eat them or build houses with them. The Scottish economist/ philosopher/historian David Hume (1711–1776) wrote that money “is none of the wheels of trade: It is the oil which renders the motion of the wheels more smooth and easy.” 1 We do not value a car for its lubrication system; we do not value an economy for its Financial System. The Financial System is important only because it affects the things that do govern our welfare: whether or not we have a job; how much we can consume now or in the future; how our government is financed; and the part that our country plays in the world. The lubrication system makes the complex parts of the car 1 David Hume, “Of Money,” in Essays, Moral, Political, and Literary , 1752. 167 168 The Financial System function smoothly; the Financial System simplifies consumption and produc-tion.

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  The Financial System, Financial Regulation and Central Bank Policy

  • Thomas F. Cargill(Author)
  • 2017(Publication Date)
  • Cambridge University Press

    (Publisher)

  Part II The Financial System Component of the Financial and Monetary Regime Chapter 3 The Financial System and the Country’s Flow of Funds 3.1 Introduction The Financial System is a component of the country’s financial and monetary regime. The Financial System consists of markets and institutions designed to trans-fer funds from lenders to borrowers through two channels: direct finance and indi-rect finance . Funds transferred through markets constitute direct finance and account for about 30 percent of the flow of funds in the United States. There are two types of financial markets: money markets, which deal in financial instruments with a maturity up to one year, and capital markets, which deal in financial instruments with a maturity greater than one year. Despite the fact that the financial markets represent only about 30 percent of the flow of funds, they are the foundation of the entire Financial System. Interest rates are determined in the financial markets directly between lenders and borrowers; financial markets provide liquidity to the rest of the Financial System and economy; and some financial markets come about as close to the model of perfect competition as one can find in any economy, because they consist of large numbers of well-informed participants purchasing and selling a well-defined product. The majority of funds in the United States and in most countries, however, are transferred through financial institutions and referred to as indirect finance, and sometimes intermediation finance . Examples of financial institutions are banks, S&Ls, credit unions, insurance companies, pension funds and finance companies. Financial institutions provide not only the majority of financial needs of the econ-omy but also financial services to a larger number of smaller lenders and borrowers than cannot be accommodated in direct financial markets.

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  Financial Economics

  • Frank J. Fabozzi, Edwin H. Neave, Guofu Zhou(Authors)
  • 2012(Publication Date)
  • Wiley

    (Publisher)

  In these economies, an analysis of financial markets would give a very incomplete picture of how the Financial System works. As a second example, studying the financial intermediaries in a Financial System does not show how intermediaries complement both market and internally provided forms of finance. Even for developed econo- mies such as those of the United States and the United Kingdom, a comprehensive understanding of the Financial System requires examining the complementary roles played by the principal types of external finance—market and intermediated transactions—as well as the complementarities between external and internal finance. The study of Financial Systems is worthwhile both for its own sake and because financial activity contributes importantly to economic well-being. Yet these beneficial effects are rarely apparent to casual observers. Indeed, some readers of the financial press may have the misleading impression that a Financial System is principally a set of markets in which shares of stocks and exotic instruments such as financial derivatives are traded. But in fact, financial activity generates a significant share of national income in many economies, and most of this income is generated by performing everyday functions, such as transferring funds between economic agents, investing accumulated wealth, funding viable new projects, and managing risks. At the same time, a Financial System’s economic importance extends well beyond performing everyday functions. Macroeconomic theory explains that while con- sumption, investment, and government spending are the major determinants of economic activity over the near term, changes in the rate of investment (capital formation) importantly affect the rate of economic growth. Moreover, different amounts and types of capital formation can also affect an economy’s productivity and its international competitiveness.

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  Fundamentals of Financial Instruments

  An Introduction to Stocks, Bonds, Foreign Exchange, and Derivatives

  • Sunil K. Parameswaran(Author)
  • 2022(Publication Date)
  • Wiley

    (Publisher)

  CHAPTER 1 An Introduction to Financial Institutions, Instruments, and Markets THE ROLE OF AN ECONOMIC SYSTEM Economic systems are designed to collect savings in an economy and allocate the available resources efficiently to those who either seek funds for current consumption in excess of what their resources would permit, or else for investments in productive assets. The key role of an economic system is to ensure efficient allocation . Efficient and free flow of resources from one economic entity to another is a sine qua non for a modern economy. This is because the larger the flow of resources and the more effi-cient their allocation, the greater is the chance that the requirements of all economic agents can be satisfied, and consequently the greater are the odds that the economy’s output will be maximized. The functioning of an economic system entails making decisions about both the production of goods and services and their subsequent distribution. The success of an economy is gauged by the extent of wealth creation. A successful economy con-sequently is one that makes and implements judicious economic decisions from the standpoints of production and distribution. In an efficient economy, resources will be allocated to those economic agents who are able to derive the optimum value of output by employing the resources allocated to them. Why are we giving so much importance to the efficiency of an economic system? The emphasis on efficiency is because every economy is characterized by a relative scarcity of resources as compared to the demand for them. In principle, the demand for resources by economic agents can be virtually unlimited, but in practice, economies are characterized by a finite stock of resources. Efficient allocation requires an extraordinary amount of information as to what people need, how best goods and services can be produced to cater to these needs, and how best the produced output can be distributed.

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  A Systems Perspective on Financial Systems

  • Jeffrey Yi-Lin Forrest(Author)
  • 2014(Publication Date)
  • CRC Press

    (Publisher)

  Part 2 Domestic Financial System: Seen as a closed system This page intentionally left blank This page intentionally left blank Chapter 3 The financial infrastructure As what has been shown in Chapter 2 earlier, the universe generally can be seen as an ocean of systems, which in turn can be thought of as abstract rotational yoyo fields of different scales that compete with each other. When one focuses on the finance of a nation as a system, the particular Financial System of the nation is made up of fluids, such as money, information, knowledge, etc., where other than studying information and knowledge as fluids by making use of continuous and differentiable functions, money should also be treated as a fluid that circulates around all corners of the nation and fuels the entire economy. If in a specific geographic area the money supply is low, then the regional economic development will suffer and the local residents would have to look for employment and other opportunities somewhere else. If this trend continues, the specific region would have to be abandoned eventually. At the same time, money should also be seen as a carrier of other relevant fluids, such as the relevant information and knowledge, which dictate where the opportunities are so that money as a fluid flows to where it could find the maximal returns. In this part of the book, we look at the Financial System of a general industrialized nation from the viewpoint of fluids and fluid dynamics, while assuming that the nation is in isolation so that no (major) external effect exists to influence its financial stability, its social structure, and its political operation. Similar to what is done in natural science, we first look at closed systems. After we have gained sufficient understanding of such systems, we then investigate the interaction between such relatively closed systems.

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  The Financial Crisis

  Origins and Implications

  • P. Arestis, R. Sobreira, José Luis Oreiro, P. Arestis, R. Sobreira, José Luis Oreiro(Authors)
  • 2010(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  These committees supervised competition within the Financial System, while also overseeing the interaction between finance and the rest of the economy. 142 The Financial Crisis It is apparent that the rent-like aspect of financial returns when finance is regulated as a system could become a source of corruption. Protected and secure returns could generate unusual rewards for the managers of finance and also for the state bureaucrats involved in regu- lating the Financial System. By the same token, direction of credit and regulation of financial prices could invite political favouritism and pub- lic corruption. Such phenomena were commonly observed throughout the developing world, but also in developed countries with entrenched bank-based systems. It should be noted, however, that they are far from an exclusive privilege of bank-based finance, or of regulating finance as a system. Market-based finance and regulating financial institutions are also prone to phenomena of corruption, which however acquire a different form for reasons discussed below. Finally, regulated bank-based systems in and of themselves offer no guar- antees of successfully attaining growth and development aims. At the very least they also require a well-educated and efficient bureaucracy, a prevalent spirit of public service – including in running financial institutions – regular renewal of the personnel that operate the levers of control, transparency and public accountability, and so on. These are difficult and complex mechanisms to put in place that also depend on the historical, institu- tional, customary, and even cultural practices in each country. Above all, they depend on the balance of social forces and the ability of broad layers of working people to exercise democratic control over the complex skein of relations between industry, finance, and the state.

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