Overview of Financial System

Overview of the Financial System Presented by:BSAcute Group

What is a financial system?A financial system consists of institutional units and markets that interact, typically in a complex manner, for the purpose of mobilizing funds for investment and providing facilities, including payment systems, for financing of commercial activity. (IMF)* Institutional unit- an entity such as household, corporation or government agency that is capable in its own right of owning assets, incurring liablities, and engaging in economic activities and transactions with other entities.2A financial system:Channels funds from lenders to borrowersCreates liquidity and moneyProvides a payments mechanismOffers portfolio adjustment facilitiesProvides financial services like insurance and pensionsAllows money to go between savers and borrowers3Nature and Importance of Financial SystemAllocate or match the supply of savings in the economy to the users of those savings in a safe and efficient mannerFinancial system is vital to our economy so the government regulates and supervises its operation

Elements of a Financial SystemFinancial Institutions- firms that provide financial services to net lenders and net borrowers.

Roles of Financial InstitutionsTerm transformation2. Economies of scale and diversification in the use of funds3. Technical Expertise

Elements of Financial System2. Financial Market - an organizational framework within which instruments can be bought and sold.

The purpose of financial market is to set prices for global trade, raise capital, and transfer liquidity and risk.7Segments of Financial MarketsDirect FinanceBorrowers borrow directly from lenders in financial markets by selling financial instruments which are claims on the borrowers future income or assets. Indirect FinanceBorrowers borrow indirectly from lenders via financial intermediaries by issuing financial instruments which are claims to the borrowers future income or assets

Direct Finance When net lenders lend their funds directly to net borrowersFinancial Institutions Firms that provide financial services to net lenders and net borrowers; the most important financial institutions are financial intermediaries.Financial Intermediaries Financial institutions that borrow from net lenders for the purpose of lending to net borrowersIndirect Finance - When net borrowers borrow from financial intermediaries that have acquired the funds to lend from net lendersDefault When a borrower fails to repay a financial claimTransactional Costs The cost associated with borrowing and lending or making other exchanges

8Net LendersFinancial Markets (Stock Market, Bond Market, etc.)Net BorrowersDIRECT FINANCEFinancial Intermediaries ( Banks, savings and loan association, etc.)INDIRECT FINANCETypes of Financial MarketFINANCIAL MARKETCAPITAL MARKETMONEY MARKETCapital MarketCapital market include the equity ( stock) and debt (bond) market.Most widely followed marketsUsed for long term basis and assets mature greater than one year

Bonds market (types of instruments)1. Government bond2. Corporate Bond11Bond MarketIssuers and Investor in the local bond marketIssuers:BSP National GovernmentCommercial BanksMain Investors: Banks, Insurance Companies, Corporation and Institutional Investors

Types of Capital Market Primary Market- market in which newly-issued securities are sold to the initial buyers by the corporation or government borrowing the fundsSecondary Market- market in which previously- issued securities are traded.13Money Marketa mechanism that deals with the lending of short term- funds (less than one year)

Money Market Financial InstrumentsIncludes the following:Treasury billsCommercial billsPromissory notesDepositsCollateral loansBills of exchangeParticipants in the Philippine Financial MarketBangko Sentral ng PilipinasCommercial BanksBrokersForeign InvestorsCorporate and Institutional InvestorsIntroducing the Financial System3.Financial intermediaries- most important financial institutions-Various institutions such as banks, savings, and loan association and credit unions that serve as go-betweens to link up net lenders and net borrowersMore on financial intermediariesDefault- failure of the borrower to pay interest, repay principal or bothLiquidity The ease with which a financial claim can be converted to cash without loss of value.Transaction cost The cost associated with borrowing and lending or making other exchanges

More on financial intermediariesThey acquire the funds of net lenders by offering claims on themselvesThey pool the funds they acquire from many individual net lenders and then use the funds to make loans to businesses and householdsThey are lending out the surpluses they accept from the net lenders while also appraising and diversifying the risk associated with lending directly to net borrowersDepository Institutions and Other Types of IntermediariesDepository Institutions Financial intermediaries that issue checkable depositsCheckable Deposits Deposits that are subject to withdrawal by writing a checkElements of a Financial System4. Financial Instruments- These are assets belonging to a person or company. This can include cash, bonds, or other assets; such as property or items of value..Components of Philippine Financial SystemThe Philippine financial system consists of:1. Banks 2. Non- bank financial intermediaries

Key Services Provided by Financial SystemRisk SharingLiquidityInformationResources:Bain,K. and Howells, P. (2000). Financial Markets and Institutions. Essex, England. Pearson Education LimitedHudgins, S. and Rose, P. (2010). Bank Management and Financial Services. New York. McGraw- Hill EducationBSP. ND. Money and Banking in the Philippines.