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Meaning: In finance, thefinancial systemis the

system that allows the transfer of money


between savers (and investors) and
borrowers. A financial system can operate
on a global, regional or firm specific level.
Gurusamy, writing inFinancial Services and
Systemshas described it as comprising "a
set of complex and closely interconnected
financial institutions, markets, instruments,
services, practices, and transactions."

A financial system can be defined at the


global, regional or firm specific level.
The firm's financial system is the set of
implemented procedures that track the
financial activities of the company.
On a regional scale, the financial system is
the system that enables lenders and
borrowers to exchange funds.
The global financial system is basically a
broader regional system that encompasses
all financial institutions, borrowers and
lenders within the global economy.

Theglobal financial system(GFS) is


thefinancial systemconsisting
ofinstitutionsand regulators that act on
the international level, as opposed to those
that act on a national or regional level. The
main players are the global institutions,
such asInternational Monetary
FundandBank for International
Settlements, national agencies and
government departments, e.g.,central
banksand finance ministries, private
institutions acting on the global scale,
e.g.,banksandhedge funds, and regional
institutions, e.g., theEuro zone.

Difference between IMS & IFS


International Monetary
System
It constitutes an
integrated set of money
flows and related
governance institutions
that establish the
quantities of money, the
means for supporting
currency requirements
and the basis for
exchange among
currencies in order to
meet payments
obligations within and
across countries.

International Financial
System

It constitutes the full


range of interest and
returnbearing assets,
bank and nonbank
financial institutions,
financial markets that
trade and determine
the prices of these
assets, and the
nonmarket activities
through which the
exchange of financial
assets can take place.

Central banks, international


financial institutions,
commercial banks and
various types of money
market funds along with
open markets for currency
and, depending on
institutional structure,
government bonds are all
part of the international
monetary system.
Money is used as a unit of
account and/or a medium of
exchange to support and
foster the exchange of
goods and services, and
capital flows, within and
across countries.

Private equity transactions,


private equity/hedge fund
joint ventures, leverage
buyouts whether bank
financed or not, etc. are the
best examples for
international financial
system.
In IMS money (in contrast
to financial assets) is not
interest bearing. But under
IFS it is a interest bearing.
The IFS lies at the heart of
the global credit creation
and allocation process.

Money is used as a unit of


account and/or a medium of
exchange to support and
foster the exchange of goods
and services, and capital
flows, within and across
countries; to calibrate values
and advance the exchange of
financial assets; and to
foster the development of
financial markets.
IMS events are often about
the availability of liquidity.
IMS events can be resolved
primarily through central
bank action and common
agreement.

the IFS depends on the


effective functioning and
prudent management of the
IMS and the ready
availability of currencies to
support the payment
system.
The IFS encompasses the
IMS but extends in
function and complexity well
beyond the IMS.
IFS crises are more complex
and far reaching. They can
involve regulatory and
reporting changes; they
have significant and
enduring economic effects.

Components of Financial
System.
1. Money.
2. Banking and Financial
Institutions.
3. Financial Instruments.
4. Financial Markets.
5. Central Banks.

Money: Money is defined as anything that is


generally accepted in payment for
goods and services or in the
repayment of debt.
Monetary theory ties changes in the
money supply to changes in
aggregate economic activity and the
price level.

Banking and Financial


Institutions:Financial Intermediaries are institutions
that channel funds from individuals with
surplus funds to those desiring funds but
have shortage of it.
Among other services, they allow
individuals to earn a decent return on their
money while at the same time avoiding
risk; e.g., banks, insurance companies,
finance companies, investment banks,
mutual funds, brokerage houses,

Banks are financial institutions that accept


deposits and make loans.
Banks make the monetary system a lot more
efficient by reducing our need to carry a lot
of cash.
Innovations in banking like debit cards,
direct deposit, and automatic bill-paying
reduce that inconvenience even further, and
also reduce such bank-related
inconveniences of time spent standing in line
at the bank, writing checks, or visiting the
ATM.

Financial
Instruments:Securities is a name that commonly refers
to financial instruments that are traded on
financial markets.

A security (financial instrument) is a formal


obligation that entitles one party to receive
payments and/or a share of assets from
another party; e.g., loans, stocks, bonds.
Even an ordinary bank loan is a financial
instrument.

Financial Markets: Financial markets are mechanisms that


allows people to easily buy and sell
(trade) financial securities (such as
stocks and bonds), commodities (such as
precious metals or agricultural goods),
and other fungible items of value at low
transaction costs and at prices that
reflect;
e.g., Bahrain Stock Exchange, New York
Stock Exchange, U.S. Treasury's online
auction site for its bonds.

Types of Financial Markets: Money and Capital Market.


Primary and Secondary Market.
Debt Market.

The Stock Market


A stock (a common stock) represents a share
of ownership of a corporation, or a claim on a
firm's earnings/assets.
Stocks are part of wealth, and changes in
their value affect people's willingness to
spend.
Changes in stock prices affect a firm's ability
to raise funds, and thus their investment.
The stock market is important because it is
the most widely followed financial market
nowadays.

The Foreign Exchange Market


The foreign exchange market is where
funds are converted from one
currency into another.
The foreign exchange rate is the price
of one currency in terms of another
currency.
The foreign exchange market
determines the foreign exchange rate.

Euro Bond Market: The Eurobond market is made up of


investors,banks,borrowers, and trading
agents that buy, sell, and transfer Eurobonds.
Eurobonds are a special kind ofbondissued
by European governments and companies,
but often denominated in non-European
currencies such as dollars and yen.
They are also issued by international bodies
such as the World Bank. The creation of the
unified European currency, the euro, has
stimulated strong interest in eurodenominated bonds as well;

Eurobonds are unique and complex


instruments of relatively recent origin.
They debuted in 1963, but didn't gain
international significance until the early
1980s. Since then, they have become a
large and active component of international
finance. Similar to foreign bonds, but with
important differences, Eurobonds became
popular with issuers and investors because
they could offer certain tax shelters and
anonymity to their buyers. They could also
offer borrowers favorableinterest
ratesandinternational exchange rates.

Conventional foreign bonds are much simpler than


Eurobonds; generally, foreign bonds are simply issued
by a company in one country for purchase in another.
Usually a foreign bond is denominated in the currency
of the intended market. For example, if a Dutch
company wished to raise funds through debt to
investors in the United States, it would issue foreign
bonds (dollar-denominated) in the United States. By
contrast, Eurobonds usually are denominated in a
currency other than the issuer's, but they are intended
for the broader international markets. An example
would be a French company issuing a dollardenominated Eurobond that might be purchased in the
United Kingdom, Germany, Canada, and the United
States.

Like many bonds, Eurobonds are usually


fixed-rate, interest-bearing notes,
although many are also offered with
floating rates and other variations. Most
pay an annual coupon and have maturities
of three to seven years. They are also
usually unsecured, meaning that if the
issuer were to go bankrupt, Eurobond
holders would normally not have the first
claim to the defunct issuer's assets.