Modern Financial System
Chapter 1 A modern financial system: an overview
The introduction of money and the development of local markets to trade goods were the genesis of the financial system of today. Money is a medium of exchange that facilitates transactions for goods and services. With wealth being accumulated in the form of money, specialised markets developed to enable the efficient transfer of funds from savers (surplus entities) to users of funds (deficit entities). A modern financial system comprises financial institutions, instruments and markets that provide a wide range of financial products and services. Importantly, a financial system encourages accumulated savings which are then available for investment within an economy. Financial assets, or financial instruments, incorporate attributes of risk, return (yield), liquidity and time-pattern of cash flows. Savers are able to satisfy their own personal preferences by choosing various combinations of these attributes. By encouraging savings, and allocating savings to the most efficient users, the financial system has an important role to play in the economic development and growth of a country. A range of different financial institutions has evolved to meet the needs of financial market participants and to support economic growth. Chapters 2 and 3 examine the major types of financial institutions. At this stage the institutions are categorised by the nature of their principal activities. Depository institutions, such as commercial banks, building societies and credit unions, specialise in gathering savings in the form of deposits and use those funds in the provision of loans to customers. Investment banks and merchant banks tend to specialise in the provision of off-balancesheet advisory services to clients (e.g. merger and acquisition advice). Contractual savings institutions, such as insurance offices and superannuation funds, enter into obligations in which they receive funds on the undertaking they will pay a policy holder
The introduction of money and the development of local markets to trade goods were the genesis of the financial system of today. Money is a medium of exchange that facilitates transactions for goods and services. With wealth being accumulated in the form of money, specialised markets developed to enable the efficient transfer of funds from savers (surplus entities) to users of funds (deficit entities). A modern financial system comprises financial institutions, instruments and markets that provide a wide range of financial products and services. Importantly, a financial system encourages accumulated savings which are then available for investment within an economy. Financial assets, or financial instruments, incorporate attributes of risk, return (yield), liquidity and time-pattern of cash flows. Savers are able to satisfy their own personal preferences by choosing various combinations of these attributes. By encouraging savings, and allocating savings to the most efficient users, the financial system has an important role to play in the economic development and growth of a country. A range of different financial institutions has evolved to meet the needs of financial market participants and to support economic growth. Chapters 2 and 3 examine the major types of financial institutions. At this stage the institutions are categorised by the nature of their principal activities. Depository institutions, such as commercial banks, building societies and credit unions, specialise in gathering savings in the form of deposits and use those funds in the provision of loans to customers. Investment banks and merchant banks tend to specialise in the provision of off-balancesheet advisory services to clients (e.g. merger and acquisition advice). Contractual savings institutions, such as insurance offices and superannuation funds, enter into obligations in which they receive funds on the undertaking they will pay a policy holder