financial system


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financial system

a network of financial institutions (COMMERCIAL BANKS, BUILDING SOCIETIES, etc.) and markets (MONEY MARKET, STOCK MARKET), dealing in a variety of financial instruments BANK DEPOSITS, STOCKS and SHARES, etc.), which are engaged in money transmission activities and the provision of LOAN and CREDIT facilities. The financial institutions and markets occupy a key position in the economy as intermediaries in channelling savings and other funds to borrowers and investors. In doing this one of their main roles is to reconcile the different requirements of savers and borrowers, thereby facilitating a higher level of saving and investment in the economy than would otherwise be the case. Depositors with financial institutions are seeking a relatively risk-free repository for their monies, combining ready access to their money with a longer term investment return, which provides for current income and/or capital appreciation. Borrowers, in general, require access to funds of varying amounts to finance short-, medium- and long-term debt and capital investment, often, as is particularly the case with business investments, under conditions of substantial risk. The financial institutions help to reconcile these different requirements in three main ways:
  1. by combining together the deposits and savings of many individuals, thus making it possible to make single large-scale loans;
  2. by pooling the resources of many depositors and savers to provide both for an individual to withdraw his funds at short notice while maintaining, in the round, a substantially large and stable financial base to underpin long-term lending;
  3. by holding a diversified portfolio of assets and lending for a variety of purposes so as to provide for various risk-return combinations.

In the UK the financial system is regulated by the BANK OF ENGLAND in combination with the FINANCIAL SERVICES AUTHORITY. See FINANCIAL SERVICES ACT 1986, BANKING SYSTEM, CLEARING HOUSE SYSTEM, BUILDING SOCIETIES ACT, 1986.

financial system

a network of financial institutions (BANKS, COMMERCIAL BANKS, BUILDING SOCIETIES, etc.) and markets (MONEY MARKET, STOCK EXCHANGE) dealing in a variety of financial instruments (BANK DEPOSITS, TREASURY BILLS, STOCKS and SHARES, etc.) that are engaged in money transmission and the lending and borrowing of funds.

The financial institutions and markets occupy a key position in the economy as intermediaries in channelling SAVINGS and other funds to BORROWERS. In so doing, one of their principal tasks is to reconcile the different requirements of savers and borrowers, thereby facilitating a higher level of saving and INVESTMENT than would otherwise be the case. Savers, in general, are looking for a safe and relatively risk-free repository for their monies that combines some degree of liquidity (i.e. ready access to their money) with a longer-term investment return that protects the real value of their wealth as well as providing current income. Borrowers, in general, require access to funds of varying amounts to finance current, medium-term and long-term financial and capital commitments, often, as is especially the case with business investments, under conditions of unavoidable uncertainty and high degrees of risk. The financial institutions help to reconcile these different requirements in the following three main ways:

  1. by pooling together the savings of a large number of individuals, so making it possible, in turn, to make single loans running into millions of pounds;
  2. by holding a diversified portfolio of assets and lending for a variety of purposes to gain economies of scale by spreading their risks while still keeping profitability high; (c) by combining the resources of a large number of savers to provide both for individuals to remove their funds at short notice and for their own deposits to remain stable as a base for long-term lending.
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