The financial system is responsible for mediating between those people who do not spend all their income (they have excess money) and those who spend more than they have (who need such resources to finance their consumption or investment activities such as opening a business, buying own house, etc.).
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The financial system allows money to circulate in the economy, pass through many people, and carry out transactions with it, which encourages a number of activities, such as investment in projects that cannot be achieved without a minimum amount of resources. Therefore, they could perform, this being how the entire economy is encouraging.
To achieve its objective, the financial system needs three essential elements:
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They act as intermediaries between the people who have available resources and those who request those resources. There are different types of financial intermediaries, depending on the activity to be carrie out: there are institutional stakeholders such as insurance companies, pension funds, or mutual funds; investment intermediaries, which are institutions that attract money or other types of resources from small investors and invest them in stocks or bonds, forming investment portfolios; and finally, depository institutions, of which banks are the best-known type.
We can also include the institutions in charge of regulating and controlling financial intermediaries; examples of these in Colombia are the Banking Superintendence, the Banco de la Republics, etc.
They are the tools (titles) use by the financial system to facilitate the mobility of resources. These constitute a means of maintaining wealth for those who own them and liability for those who issue them. An example may be a savings account; this product is a way of preserving the client’s wealth (holder) and, at the same time, represents a liability for the bank (issuer).
Financial assets can be generate by the public sector (bonds, treasury bills, among others) or by the private sector (obligations, investment funds, among others).
It is the place, mechanism, or electronic system in which financial asset exchanges are Carrie out, and their prices are defined. The purpose of the financial market is to put buyers and sellers in contact.
The financial system is the set of organizations (financial and government entities), media (financial assets), and markets that make it possible for the funds (idle money) of some economic agents to end up in the hands of credit applicants.
Thus channeling savings and investment to ensure that they are allocated in the most brilliant way possible. And, like importance, there is economic growth.
Therefore. The financial system facilitates between those who have excess money and want to lend it and persons who need funding. In other words, what the financial system makes credit. A significant actor within the financial system is the banks. Which act as mediators between persons with excess money and those who need it.
In addition, they facilitate the situations for both parties. They adjust the time and quantity of the money they receive and lend. Depending on the needs of the economic agent with excess cash and the money applicant. A direct loan by the offeror of savings and the applicant would be impossible because their money needs would perhaps not be the same in terms of amount and time.
From the point of understanding of those who have excess money, it would be an investment because this deposit in the bank would generate a return. And, from the perspective of those who want to finance. It would be a loan for a exact term, for which they will have to pay interest in addition to repaying the principal.
For this reason. The financial system is of great importance within the economy as it makes more income for those who lend and boosts the creation of companies. Which is somewhat essential for the budget.
There are different tools to carry out this relationship: banking products such as accounts, deposits, etc.; investment products such as shares, investment funds, bonds, etc.; pension plans, and insurance products such as life insurance.
People are more interested in finances and turn to the markets to solve their financial needs. However, many other people see banks as the economical solution to their needs.
Banks adopt an intermediary position to carry out advisory work.
On the other hand. To ensure that intermediaries work correctly. There is a regulation in each country that regulates these exchanges of funds. For example, in the case of Spain. A supervisory body would be the Bank of Spain. Which controls the entities that can raise funds. As well as the National Securities Market Commission (CNMV) and Universal Directorate of Insurance and Pension Funds of the Ministry of Economy. And Treasury.
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