Meaning And Segments of Financial System - SS1 Economics Lesson Note
The financial system refers to a network of institutions, markets, and intermediaries that facilitate the flow of money between savers and borrowers. It plays a critical role in the economy by allocating capital and managing risk. There are several segments of the financial system:
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Financial Institutions: These are organizations that provide financial services, such as banks, credit unions, and insurance companies. They act as intermediaries between savers and borrowers, taking deposits from savers and using those funds to make loans to borrowers.
Financial Markets: These are markets where financial instruments, such as stocks, bonds, and currencies, are bought and sold. Financial markets include stock exchanges, bond markets, and foreign exchange markets.
Financial Instruments: These are assets that can be bought and sold in financial markets, such as stocks, bonds, and derivatives. Financial instruments allow investors to manage risk and earn returns on their investments.
Payment and Settlement Systems: These are systems that facilitate the transfer of funds between parties. They include payment networks, such as credit card networks and electronic funds transfer systems, and clearing and settlement systems, which ensure that financial transactions are settled in a timely and secure manner.
Regulatory Bodies: These are organizations that oversee the financial system and ensure that it operates in a safe and stable manner. Regulatory bodies include central banks, such as the Federal Reserve in the United States, and financial regulators, such as the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).