CHAPTER 5
Overview of the
Financial System
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Understanding Financial Systems: Resource Distribution & Risk Sharing, Summaries of Accounting
An overview of the financial system, its components, and functions. The financial system facilitates the transfer of funds and assets between borrowers, lenders, and investors, promoting economic growth and generating a return on investment. It consists of financial institutions, financial markets, and financial services. Market participants include investment banks, stock exchanges, insurance companies, individual investors, and governments. The financial system provides risk sharing and liquidity, enabling economic development.
What you will learn
- What is the goal of a financial system?
- What are the main components of a financial system?
- How does the financial system promote economic growth?
- What are the functions of a financial system?
- Who are the market participants in a financial system?
Typology: Summaries
2021/2022
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CHAPTER 5
Overview of the
Financial System
FINANCIAL SYSTEM
Its goal is to efficiently
distribute economic
resources to promote
economic growth and
generate a return on
investment (ROI) for
market participants.
A financial system consists of individuals like borrowers and lenders and institutions like banks, stock exchanges, and insurance companies actively involved in the funds and assets transfer. It gives investors the ability to grow their wealth and assets , thus contributing to economic development.
Market participants functions at corporate, national, and international levels and is governed by various rules dictating the eligibility of participants and the use of funds for COMPONENTS OF THE FINANCIAL SYSTEM: Aside from financial institutions, there are โ (^) Financial Markets โ (^) Financial Assets โ (^) Financial Services
Financial Intermediaries Financial Markets Lender โ Savers
- Households
- Business Firms
- Government
- Foreigners Borrower โ Spenders
- Business Firms
- Government
- Households
- Foreigners
Funds Funds
Funds Funds
Funds
Indirect Finance
Direct Finance
FUNCTIONS OF
FINANCIAL SYSTEM
FUNCTIONS OF THE FINANCIAL SYSTEM INFORMATI ON LIQUIDIT Y RISK SHARIN G
RISK SHARING
The ability of the financial system to
provide risk sharing makes savers
more willing to buy stocks, bonds
and other financial assets.
LIQUIDITY Liquidity โ the ease with which an asset can be exchanged for money which savers view as benefit.
INFORMATION Information โ a service of financial system that deals with the collection and communication of facts about borrowers and expectations of returns on financial assets.
THE PROBLEMS OF ADVERSE SELECTION AND MORAL HAZARD
The Problems of Adverse Selection and Moral Hazard Two problems arising from asymmetric information: ๏ถ (^) Adverse Selection โ the problem investors experience in distinguishing low-risk borrowers from high- risk borrowers before making an investment.
The Problems of Adverse Selection and Moral Hazard Two problems arising from asymmetric information: ๏ถ (^) Moral Hazard โ the problem investors experience in verifying that borrowers are using their funds as intended