In this article, we will look at the major services provided by banks, insurance companies, mutual funds, stockbrokers, and other financial services firms that make up the financial system. Companies in this sector, which make different financial assets and liabilities more or less attractive to individual investors and borrowers, offer different services.
We can briefly examine each of these key services:
Efficient payment system:
One of the greatest services provided by the financial system is an efficient payment system. Financial systems make possible in any economy the use and availability of money for its various purposes. The efficiency of any financial system is the ability of its institutions (banks, trust companies, credit unions, etc.) to support billions of exchanges between the millions of people participating in the financial system. The financial system facilitates the process of exchange by facilitating the exchange of goods and services by allowing consumers to purchase goods and services using money that the system helps provide and circulate.
Second, an efficient payment system allows the use of negotiable instruments such as checks or promissory notes. In a cash-only economy, all transactions must be conducted in cash, which is not only time-consuming but also risky. Financial institutions and a financial system overcome the problems and risks associated with cash transactions. Checks can be used to make many transactions, especially larger ones, easier and more secure.
Intermediary with Investors and Borrowers:
In addition to providing an efficient payment system, the financial system acts as an intermediary, connecting savers and borrowers and transferring purchasing power from one group to another. Financial intermediaries facilitate this process by collecting funds from depositors and lending the same funds to borrowers. Commercial banks play a key role in the financial system by receiving deposits from households and businesses and investing most of those deposits, either by making loans to households and businesses or by buying securities, such as bonds. government bonds or securitized loans.
Economic and financial risk sharing:
We know that the value of financial assets changes over a period of time depending on a number of factors. Some factors may be interest earned or increased, inflation, growth of the economy, price in the stock market, relationship between supply and demand, etc. Risk is the possibility that the value of financial assets will change from your expectations or current value. The financial system allows individual depositors and borrowers to share the risk.
Most individual investors want a steady return on their assets rather than erratic swings between high and low profits. One way to improve the chances of a steady return is to hold a portfolio of assets. This helps spread the risk. For example, over a period of time, one asset or set of assets may perform well and another may not perform well, and having a diversified portfolio tends to average out profits. This division of wealth into multiple assets is known as diversification. The financial system provides risk sharing by allowing investors to invest and hold many assets simultaneously.
The ability of the financial system to provide risk sharing, coupled with the ability to make callable investments on demand, makes investors more willing to buy stocks, bonds and other financial assets. This willingness, in turn, increases the ability of borrowers to raise funds in the financial system. This generates liquidity on the systems. Liquidity is the ease with which an asset can be exchanged for cash. Liquid assets can be quickly and easily exchanged for cash, while less liquid or illiquid assets can only be exchanged for cash after a certain time or for a fee. Over the past two decades, the financial system has increased the liquidity of many other assets besides stocks and bonds. The securitization process made it possible to buy and sell securities on the basis of loans. As a result, holding mortgages and other loans also became liquid assets that investors are today.
The financial system also facilitates the collection and reporting of information or facts about borrowers and expectations of return on financial assets. Financial intermediaries collect information about borrowers and conduct their research to gain the ability to predict the likelihood that borrowers will repay the loans advanced to them. Since these financial intermarriages specialize in collecting and processing information, the costs of collecting information are lower and available to a group of information users because many financial systems share information among themselves. In addition, financial markets convey information to savers and borrowers by determining the prices of stocks, bonds, and other securities. The incorporation of available information into asset prices is an important feature of the proper functioning of financial markets.