Financial System – Definition, Objective, Importance, and More

financial system

Financial System Definition

The financial system is the set of institutions (monetary and government entities), media (financial assets). And markets that make it possible for the savings (idle money) of some economic agents to go to the hands of credit applicants.

I was channelling savings and investment to ensure that they are allocated in the most efficient way possible. And, as a consequence, there is economic growth.

Primary Objective of the Financial System

Importance of the Financial System

  1. Therefore, the financial system is critical within the economy. It generates more income for those who lend and encourages companies’ creation, something essential for the economy.
  2. There are different instruments to carry out this relationship: bank products such as accounts, deposits, etc .; investment products such as stocks, mutual funds, bonds, etc .; pension plans. And insurance products such as life insurance.
  3. There are people more interested in finance and turn to the markets to solve their financial needs. However, many other people see banks as an economical solution to their needs.
  4. Banks take an intermediary position to do advisory work.
  5. On the other hand, to ensure that intermediaries function correctly, there is a regulation in each country that regulates these exchanges of funds.
  6. In Spain’s case, a supervisory body would be the Bank of Spain, which controls the entities. It can raise funds, the National Securities Market Commission (CNMV).
  7. And the General Directorate of Insurance and Pension Funds of the Ministry of Economy and Treasury.

What is Understood by the Financial System?

  1. The financial system can be defined as the set of institutions, media and markets whose primary purpose.
  2. It is to channel the savings generated by economic agents with financing capacity to those who need financing at a given time.
  3. In short, the financial system is the set of mechanisms through which savers and investors get in contact.
  4. That makes it possible to reconcile the preferences and needs of terms of amount, term, profitability and risk.

The Function of the Financial System

The financial system fulfils the fundamental mission in a market economy of capturing the surplus from savers (spending units with excess). And channelling it to public or private borrowers (spending units with the deficit).

This mission is fundamental for two reasons:


The financial system ensures that the resources that allow the development of actual economic activity -produce and consume. It comes from those individuals who have excess money at a given time to those who need it and facilitate risk sharing.

Those who have money and do not need it in the short term to buy something. Or pay their debts to contribute to the financial system in exchange for a prize. That premium is the interest rate.

Those who need more money in the short term have to either invest in a productive project (create additional wealth) or cover a payment obligation.

In a certain period and through a previously agreed payment plan. It is willing to pay an additional cost to get the money immediately. That cost is the interest rate.

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