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Introduction To Financial System Overview

The document provides an introduction to financial systems, outlining key concepts. It explains that a financial system channels funds from savers to those with productive investment opportunities, affecting everyone. It comprises many private and public institutions that are regulated. A strong financial system is crucial for economic growth as it allows companies to raise capital and investors to accumulate savings. However, the system also attracted excesses that led to financial crises. Thus, understanding how the complex, global financial environment operates is important for financial managers and investors.

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Christian Floralde
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Download as DOCX, PDF, TXT or read online on Scribd
143 views

Introduction To Financial System Overview

The document provides an introduction to financial systems, outlining key concepts. It explains that a financial system channels funds from savers to those with productive investment opportunities, affecting everyone. It comprises many private and public institutions that are regulated. A strong financial system is crucial for economic growth as it allows companies to raise capital and investors to accumulate savings. However, the system also attracted excesses that led to financial crises. Thus, understanding how the complex, global financial environment operates is important for financial managers and investors.

Uploaded by

Christian Floralde
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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INTRODUCTION TO FINANCIAL SYSTEM

Expected Learning Outcomes

After Studying the chapter, you should be able to:

1. Explain what financial system is as well as its objectives


2. Explain how the financial system affects a nation’s economy.
3. Discuss the flow of funds through the financial system
4. Enumerate the key components of the financial system
5. Give and describe examples of financial assets and financial liabilities
6. Explain the main functions of the financial system
7. Distinguish between adverse selection and moral hazard
8. Describe how financial intermediaries
A. Reduce adverse selection
B. Reduce moral hazard problems
C. Reduce transaction costs

OVERVIEW OF THE FINANCIAL SYSTEM


INTRODUCTION:

A vibrant and healthy economy requires a financial system that makes a channels funds from people
who save to people who have productive investment opportunities. The financial system is complex
in structure and functions throughout the world. A developed economy relies on financial markets
and institutions for efficient transfer of funds. Every person’s life, family, business and government
are affected by the financial system.

A strong financial system is necessary element for a growing and prosperous economy. Companies
raising capital to finance capital expenditures and investors saving to accumulate funds for future use
require well-functioning financial markets and institutions.

Over the past few decades changing technology and improving communications have increased cross-
border transactions and expanded the scope and efficiency of the global financial system. Companies
routinely raise funds throughout the world to finance projects all around the globe. Likewise, with
the click of a mouse an individual investor in Metro Manila can deposit funds in a US Bank or purchase
a mutual fund that invests in Chinese Securities. These investors helped spur global economic growth
by providing capital to an increasing number of individual throughout the world.

However, along the way, the financial industry attracted a lot of talented people who created,
marketed, and traded a larger number of new financial products. Despite their benefits, may of these
same factors led to excesses which culminated in the financial crisis in 2008 in the United States of
America, in Europe and Southeast Asia. At the height of the crisis, many were worried that the entire
financial system could collapse and in response regulators took emergency steps.

In many ways, this crisis illustrates that financial manager and investors do not operate in vacuum
they make decisions within a large and complex financial environment.

The environment both determines the available financial alternatives and affects the outcome of
various decisions. Thus, it is crucial that investors and finance managers have a good understanding
of the environment in which they operate.

The financial system is complex, comprising many different types of private sector financial
institutions, including banks, insurance companies, finance companies, mutual funds, and investment
banks, all of which are regulated by the government.
NATURE AND OBJECTIVE OF THE FINANCIAL SYSTEM

The Financial system consists of all financial intermediaries and financial markets and their relations
with respect to the flow of funds to and from households, government, business firms and foreigners,
as well as the financial infrastructure.

Having and well-functioning financial system in place that directs funds to their most productive uses
is a crucial prerequisite for economic development.

INDIRECT FINANCE
FUNDS

FUNDS FUNDS

FUNDS FINANCIAL FUNDS


INTERMEDIARIES

Lender- Savers
Borrower-Spender
Households
Financial Business firms
Business firms
Markets Government
Government
Households
foreigners
foreigners

DIRECT FINANCE

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