The financial system refers to a set of components and mechanisms, such as monetary policies, insurance, and banks, that allows economic transactions to occur. There are many types of financial systems that exist on different levels of society, ranging from those used to operate transactions within a company to those that facilitate international financialtransactions. Without these systems, many normal activities would become difficult, if not impossible, such as trading and investing. The International Monetary Fund (IMF) says, "Resilient, well-regulated financial systems are essential for economic and financial stability in a world of increased capital flows." Money, credit cards, and checks are examples of the types of components that may exist in a financialsystem. An accounting method, an auditing service, and financing procedures are examples of mechanisms that facilitate the operation of these systems. The absence of a financial systemwould produce drastic changes because people may not have access to credit, there would be no monetary products to exchange for goods, and there would be no policies regulating complex transactions. Businesses generally exist to make money. A business, therefore, usually needs to have its own internal financial system. This can determine how transactions are approved, accounted for, and how plans are made for current assets. A business' system may mirror the functioning of a larger system but is much less complex.
A national financial system is one that will affect not only the individuals within a nation but also other nations. Since every country tends to interact with some other countries, it is necessary to have a functioning global financial system. This establishes a means for acts such as the conversion and transfer of money. It also provides a procedure for the application and granting of credit between foreign entities. For these types of international transactions to occur, there must be an established method that allows financial institutions to interact. Although each nation generally has a financial system, they do not all operate the same. In some nations, for example, the use of credit cards is common. This part of the system allows people to make purchases without money if they agree to repay the funds in small amounts and to have interest added. In other less developed nations, credit cards may not be used at all. Some financial systems are weak and inadequate. This can create many problems such as inflation and excessive debt. Systems such as these are also commonly susceptible to criminals with corrupt and fraudulent intentions. A major problem with substandard nationalfinancial systems is that they often create problems that have far-reaching effects, which can result in a global financial crisis such as that seen at the beginning of the 21st century.
The role of the financialsystem is to transfer savings, transform risk and help achieve productive investment at least cost A financial system provides the means to transfer savings from those with surplus capital to those in need of capital – and to transform risk – to help achieve productive investment at least cost over the investment horizon. That transfer may be undertaken publicly or privately, with the price of exchange set by financialintermediaries and/or individuals. A key role of the financialsystem is to minimise the problems of asymmetric information, which arise because borrowers generally know more about their investment projects than lenders. The financial systemcomprises a myriad offinancial instruments and services A country’s financialsystem comprises a myriad of financialinstruments and servicesoffered to firms (and investors) by a range ofmarkets, organisations (e.g. financialinstitutions) and individuals. Governing that system is a complex set of legal institutions (e.g. securities law) and norms (e.g. lending policies). Key components of New...
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