What is a 'Financial System'

A financial system is the system that covers financial transactions and the exchange of money between investors, lender and borrowers. A financial system can be defined at the global, regional or firm specific level. Financial systems are made of intricate and complex models that portray financial services, institutions and markets that link depositors with investors.

BREAKING DOWN 'Financial System'

The firm's financial system is the set of implemented procedures that track the financial activities of the company. On a regional scale, the financial system is the system that enables lenders and borrowers to exchange funds. The global financial system is basically a broader regional system that encompasses all financial institutions, borrowers and lenders within the global economy.

There are multiple components making up the financial system of different levels: Within a firm, the financial system encompasses all aspects of finances. For example, it would include accounting measures, revenue and expense schedules, wages and balance sheet verification. Regional financial systems would include banks and other financial institutions, financial markets, financial services In a global view, financial systems would include the International Monetary Fund, central banks, World Bank and major banks that practice overseas lending.

Financial Market Components

Financial systems are strictly regulated because they directly influence financial markets. The stability of the financial markets plays a crucial role in the monetary protection of consumers. These financial systems are mostly handled by financial institutions which include commercial banks, central banks, public banks and cooperative banks. Cooperative banks and development banks managed by states are also listed under financial institutions that have heavily regulated financial systems.

Financial systems are not only evident in bank financial institutions. Some institutions have market brokering, investment and risk pooling services. However, these institutions are non-bank financial institutions that are not regulated by a bank regulation firm or agency. Examples of non-bank financial institutions are companies that offer mutual funds, insurance, and financial loans. Companies with commodity traders are also considered to be non-bank financial institutions that have financial systems.

Another component of financial systems are financial markets that trade commodities, securities and other items that are traded according to general supply and demand. Financial markets include the primary markets and secondary markets. Primary markets provide avenues for buyers and sellers to buy and sell stocks and bonds. Secondary markets provide a venue for investors and traders to purchase instruments that have been previously bought.

Aside from financial institutions and markets, financial systems are also evident in financial instruments. These financial instruments include cash instruments and derivative instruments. Cash instruments include loans, deposits and securities. Derivative instruments are financial instruments that are dependent on an underlying asset's performance.

RELATED TERMS
  1. Financial Institution - FI

    An establishment that focuses on dealing with financial transactions, ...
  2. Shadow Banking System

    The financial intermediaries involved in facilitating the creation ...
  3. Debt Bomb

    This occurs when a major financial institution, such as a multinational ...
  4. Federal Reserve Bank

    The central bank of the United States and the most powerful financial ...
  5. Macroprudential Analysis

    A method of economic analysis that evaluates the health, soundness ...
  6. Alternative Trading System - ATS

    A trading system that is not regulated as an exchange, but is ...
Related Articles
  1. Insights

    Inside National Payment Systems

    Investopedia explains: The global interconnection of U.S. payment systems makes commerical and financial transfers possible.
  2. Trading

    Trading Systems: Run With The Herd Or Be A Lone Wolf?

    Find out if taking the path less traveled will work in your favor - or against it.
  3. Investing

    Understanding Financial Instruments

    Financial instrument is a general term used to describe a monetary asset.
  4. Personal Finance

    A Day In The Life Of A System Trader

    Systems traders divide their time between trading, developing, backtesting, optimizing and forward testing, to create viable and high-probability trading systems.
  5. Personal Finance

    What is a Financial Institution?

    A financial institution is in business to, among other things, accept deposits, make loans, exchange currencies, and broker investment securities.
  6. Trading

    Explaining the Federal Reserve System

    The Federal Reserve System is the central bank of the United States. It regulates monetary policy and supervises the nation’s banking system.
  7. Personal Finance

    What Is The Bank For International Settlements?

    Get the scoop on the structure and functions of the oldest global financial institution.
  8. Investing

    Introduction To The Chinese Banking System

    As China steps into a greater role in the global economic system, their banking system continues to evolve.
  9. Investing

    What is the Shadow Banking System?

    The shadow banking system is composed of financial institutions that do not take deposits in the tradition sense.
  10. Insights

    A Brief History of U.S. Banking Regulation

    From the establishment of the First Bank of the United States to Dodd-Frank, American banking regulation has followed the path of a swinging pendulum.
RELATED FAQS
  1. What are the major categories of financial institutions and what are their primary ...

    Understand the various types of financial institutions that exist in today's economy, and learn the purpose each serves in ... Read Answer >>
  2. What distinguishes the financial services sector from the banks?

    Learn about the difference between the banking industry and the financial services sector and how to distinguish financial ... Read Answer >>
  3. What is the difference between a capitalist system and a free market system?

    Learn about capitalist and free market systems, how these economic systems function and the main difference between capitalism ... Read Answer >>
  4. Is a person registered for Financial Instruments Business eligible to conduct both ...

    Explore Japan's 2006 Financial Instruments and Exchange Law, and understand how the law affects investment services regulation. Read Answer >>
  5. What are the main reasons an investor should consider an allocation to the banking ...

    Learn about investment opportunities in the commercial and investment banking industry. Find out why many investors choose ... Read Answer >>
  6. What are the biggest trends affecting the profitability of the financial services ...

    Explore the trends that most affect the financial services sector, including the role of central bank policy and challenges ... Read Answer >>
Hot Definitions
  1. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  2. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  3. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  4. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  5. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  6. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
Trading Center