Introduction
A financial system essentially serves to move funds from those with surplus funds to those with a shortage of funds. In developed countries, such as the United States, the financial system typically comprises lenders (savers), financial markets, financial intermediaries, and borrowers (spenders).
Funds flow from lenders to borrowers either directly or indirectly. In direct finance, funds are borrowed directly from lenders by selling them securities (claims on the borrowers future income or assets). The indirect method involves a middleman or financial intermediary that stands between the lenders (savers) and borrowers (spenders).
Financial Markets and Intermediaries
Financial markets and intermediaries are two of the functional units making up the financial sector. These include Debt and Equity Markets, Primary and Secondary Markets, Exchanges and Over-the-Counter Markets, Money and Capital Markets and Depository, Contractual and Investment Institutions.
Regulation of Financial Systems
Financial systems are usually tightly regulated by agencies under specific legislation. In the United States, for example, the financial system is among the most regulated sectors of the economy. Regulation is designed to accomplish the following:
-Provide information to investors so that they are able to determine how safe potential investments are.
-Ensure the soundness of the financial system to protect investors and depositors and funds they have invested.
-Improve control over monetary policy such as in the control of money supply through reserve requirements.
-Encourage home ownership to develop a more politically involved electorate, more responsible citizens and, ultimately, a more stable society.
