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.

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