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    Basic Elements of The Financial System

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    Jessa Arellaga
    The financial system consists of institutions that facilitate the flow of funds between sectors in order to allocate resources. It performs key functions like credit, payments, money creation, and savings. The financial system includes financial instruments, markets, institutions, and rules governing transactions. Funds flow between households, firms, the financial system, and government. Household income and spending varies over a life cycle from deficit to surplus stages. Surplus units like savers provide funds to deficit units like borrowers through direct or indirect financing via financial intermediaries such as banks, insurance companies, and investment funds.

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    Basic Elements of The Financial System

    Uploaded by

    Jessa Arellaga
    66 views3 pages
    The financial system consists of institutions that facilitate the flow of funds between sectors in order to allocate resources. It performs key functions like credit, payments, money creation, and savings. The financial system includes financial instruments, markets, institutions, and rules governing transactions. Funds flow between households, firms, the financial system, and government. Household income and spending varies over a life cycle from deficit to surplus stages. Surplus units like savers provide funds to deficit units like borrowers through direct or indirect financing via financial intermediaries such as banks, insurance companies, and investment funds.

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    BASIC ELEMENTS OF THE FINANCIAL SYSTEM

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    BASIC ELEMENTS OF THE FINANCIAL SYSTEM - Copy

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    The financial system consists of institutions that facilitate the flow of funds between sectors in order to allocate resources. It performs key functions like credit, payments, money creation, and savings. The financial system includes financial instruments, markets, institutions, and rules governing transactions. Funds flow between households, firms, the financial system, and government. Household income and spending varies over a life cycle from deficit to surplus stages. Surplus units like savers provide funds to deficit units like borrowers through direct or indirect financing via financial intermediaries such as banks, insurance companies, and investment funds.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    66 views3 pages

    Basic Elements of The Financial System

    Uploaded by

    Jessa Arellaga
    The financial system consists of institutions that facilitate the flow of funds between sectors in order to allocate resources. It performs key functions like credit, payments, money creation, and savings. The financial system includes financial instruments, markets, institutions, and rules governing transactions. Funds flow between households, firms, the financial system, and government. Household income and spending varies over a life cycle from deficit to surplus stages. Surplus units like savers provide funds to deficit units like borrowers through direct or indirect financing via financial intermediaries such as banks, insurance companies, and investment funds.

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    © All Rights Reserved
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    BASIC ELEMENTS OF THE FINANCIAL SYSTEM:

    Financial System
    - institutional mechanism established by society to produce and deliver financial-
    services and allocate resources
    - consisting of the business firms supplying financial services
    - government regulatory authorities that enforce the rules prevailing within the
    financial sector
    Functions of Financial System
    - Credit
    - mechanism of borrowing funds from another sector
    TYPES OF BORROWERS
    - consumers
    - business
    - government
    - Payment
    - takes the form of currency, checks, bank transfer, etc.
    - can be done electronically
    - Money creation
    - BSP (Bangko Sentral ng Pilipinas) is primarily responsible in creation of
    money in PH
    - facilitating the other use of currency through payments
    CREATING MONEY:
    - Old basis: Gold and Silver, "BULLION"
    - New basis: Resources of a country, labor, people, financial and
    natural resources
    - Savings
    - "surplus"
    - means of accepting deposits and loans through financial institutions
    Components of a Financial System:
    - Financial Instrument
    - Financial Sector - flow of currency through other sectors
    - Financial Markets
    - Financial Institutions
    - Rules Governing the Conduct of Trade
    - designed to be intact and to function well
    Financial System and Flow of Funds *check photos for the table*
    *wages, dividends, interests, purchases, taxes, savings, lending
    - Firms
    - Households
    - income comes from firms (INCOME) and used for necessities
    (EXPENSES)
    - firm's salaries for labor (EXPENSES) and consumers buy to firms
    (INCOME)
    - excess funds >> FINANCIAL SYSTEM
    - lending >> FINANCIAL SYSTEM
    - Financial System
    - Borrowing >> FIRMS
    - Investment Expenditure >> FIRMS
    - Government
    Relationship between Household Income and Spending at Various Stages
    Stages in Life Cycle of the Household, Income, and Financial Decisions
    - New
    - smaller than expenses
    - spends savings or borrow
    - Middle Age
    - bigger than expenses
    - build up savings and liquidate borrowings
    - Retirement
    - smaller than expenses
    - spend savings
    Transferring Funds from Lenders to Borrowers
    - Lenders SSU (Surplus Spending Units)
    - individuals in which incomes are greater than expenditures
    - savings >> Borrowers DSU
    - Borrowers DSU (Defecit Spending Units)
    - individuals in which expenses are greater than income, usually
    households
    - return/interest >> Lenders SSU
    Methods of Financing
    - Direct Financing
    - lending by ultimate borrowers with no intermediary
    - SSU gives money to DSU in exchange for financial claims on DSU
    - Indirect Financing
    - also known as FINANCIAL INTERMEDIATION
    - refers to lending by the ultimate lender to a financial intermediary that
    then relends to ultimate borrowers
    Categories of Financial Intermediaries
    1. Depository Intermediaries
    - sources of funds consists of deposits received from businesses,
    households, and governments
    - commercial banks, credit unions, savings and loan association, and
    savings banks
    2. Contractual Intermediaries
    - enter into contracts with their customers to promote savings or financial
    protections against loss of life or property
    - consists of life and nonlife insurance companies, GSIS, SSS, private
    pension funds, and educational plan companies
    3. Secondary Intermediaries
    - conducts general insurance but, not as their main business activity
    - depend heavily on other financial intermediaries like commercial banks
    for loanable funds
    - finance companies, mortgage banks, real investment trusts
    4. Investment Subsidiaries
    - offers the public securities that can be held indefinitely as a long term
    investment and which can be quickly sold when the customer
    needs his funds returned.
    - includes mutual stock funds, bond funds, money market funds
    Financial Intermediaries and Their Sources of Funds
    Types of Intermediary Source of Funds
    Commercial Banks Deposits
    Savings and Loan Association Deposits
    Mutual Savings Banks or cooperative Deposits
    Credit Union Deposits
    Life Insurance Companies Premium from policyholders
    Nonlife insurance companies Premium from policyholders
    Pension fund companies , GSIS, SSS Employer and employee contributions
    Finance Companies Issues of commercial paper, stocks,
    bonds
    Mutuals Funds Issues of shares
    Money market mutual funds Issues of shares

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