FINANCIAL SYSTEM –OVERVIEW

Prof. Manoharan.M
FINANCIAL SYSTEM
 Financial system is all about
 Financial institutions
 Financial markets
 Financial instruments
 Legal and Regulatory mechanism
 Participants and circular flow of money
 Various functions (savings ,investments, credit, capital
etc )

Financial System is
• the collection of markets, institutions, laws, regulations, and
techniques
• through which bonds, stocks, and other securities are traded,
interest rates are determined, and financial services are produced
and delivered around the world.
FINANCIAL SYSTEM –CONTD.,
 The financial system
 Channelizing flows
 produces and distributes financial services
 supply of credit which allows businesses, households,
and governments to invest and acquire assets
 The financial system of money and capital
markets
i. determines amount and cost of credit available
ii. determines the supply and cost of credit
iii. affects the health and growth of the global economy
and our own economic welfare.
 Financial
System

Financial institutions Financial markets Financial services

1.Regulatory 1.Organized and

unorganized 1. Commercial Banking
2.Intermediary
2. Primary and secondary 2. Stock trading/broking
i.Banking
ii.Non-banking 3.. Mutual fund house
3.Non intermediary 3.ARC
4.Others 4.Advisory
1. Capital markets – Equity 5.Portfolio Mgmt.
and debt
2. Forex Markets
3. Commodities markets
4. Money market
5. Derivatives markets
FUNCTIONS OF THE GLOBAL FINANCIAL
SYSTEM

 Savings function
 Wealth function

 Liquidity function

 Credit function

 Payment function

 Risk protection function

 Policy function
FACTORS TYING ALL FINANCIAL MARKETS
TOGETHER
 Credit, the common commodity.
 The shifting of borrowers among markets helps to
weld the financial system together and to balance
the costs of credit in the different markets.
 Speculation and arbitrage.
 help to level out prices and maintain price
consistency among the markets.
 Perfect and efficient markets.
 Some research evidence suggesting that financial
markets are closely tied to one another due to their
near perfection and efficiency.
 Financial markets in the real world.
 In the real world however, market imperfection and
information asymmetry exist.
THE DYNAMIC FINANCIAL SYSTEM
 The global financial system is rapidly changing.
 In particular, the trend towards the global
integration of financial systems has been aided
by the gradual deregulation of financial
institutions and services as well as the
increasing harmonization of their regulations.
Reasons for dynamic nature
1. Globalization and financial Globalization
2. Financial Engineering
3. Privatization
4. Disinvestments
5. Mergers & Acquisitions
6. Securitization
7. Role of technology in the Fin. System
FINANCIAL SYSTEM AND THE CRISES
 Banking crisis
 Stock market speculative bubble and crash
 Currency crisis
 Trade wars and Currency wars
 Global financial crisis – contagion and spillover

Notable Crises of the Past

1929 –Great Depression
1997 –Asian Financial Crisis
2007-09 –Global Financial Crisis
2010- Euro zone sovereign debt crisis
WHAT DO YOU KNOW ABOUT
 Ongoing trade war b/w USA and China
 The Growing NPA of Indian bank sector

 Scandals and crimes in banking industry

 Venezuela’s hyper inflation

 Oil price and the Indian economy

 Rainfall and the Indian Economy

 Bitcoin and impact on real currency

KEY SOURCE OF INFORMATION
 Business Line
 The Economic Times
 Moneycontrol.com
 Cnbc.com
 Reuters.com
 Bloomberg.com
 Economic and Political weekly (EPW)
 RBI website
 Central Banks’ Policy notes and reports
 The Economist