18 Examples of the Financial System
John Spacey, April 24, 2021
The financial system is the network of institutions that facilitate commercial transactions. This includes transactions related to the production and purchase of goods and the investment of capital. The following are common elements of the global financial system.
Central BanksAn institution that controls the creation of money and credit for a nation. This is also known as a monetary authority and is considered an important tool for managing an economy. For example, credit can be expanded and interest rates reduced to stimulate economic activity in a downturn.
International Financial InstitutionsInstitutions that are founded by multiple nations. For example, a development bank that funds hard and soft infrastructure projects in developing countries.
Commercial BanksBanks that provide bank accounts, loans, investment and payment products to individuals and businesses. These play a critical role in the economy by allowing people to put capital to work, store wealth and obtain loans such as mortgages.
Retail BanksA commercial bank that serves individuals and small to mid-sized businesses.
Credit UnionsRetail banks that are run as non-profit member-owned financial cooperatives.
State BanksBanks owned by a government at the national or regional level. These are typically commercial banks that provide a broad range of services to individuals and businesses.
Finance CompaniesFinancial firms that only provide loans. These may specialize in high risk loans or loans in a particular industry. For example, a firm that specializes in construction loans.
Captive Finance CompanyA finance company created by a firm to help sell its products and services. For example, an automaker that finances customer purchases with a wholly owned subsidiary.
Government-sponsored EnterpriseA financial firm founded by a government, often to used to expand credit available to an economy. For example, a government funded institution that funds mortgages.
Fund CompaniesFirms that provide investment products such as an exchange traded fund.
Investment BanksBanks that provide services to governments, large businesses and wealthy families. For example, an investment bank that helps a large business issue bonds to fund its operations.
Custodian BankA bank that holds and administers assets and securities on behalf of owners. This allows assets to be traded without having to actually take possession and administer them. For example, a custodian bank that holds stocks for brokerages that handles corporate actions such as stock splits.
ClearinghousesFirms that act as an intermediary between buyer and seller in a financial market. A clearinghouse is essentially a middleman that settles trades.
Wholesale BankingBanks that provide services to other banks and financial entities such as large real estate developers. For example, underwriting services whereby a wholesale bank assumes a financial risk for a fee such as the risk associated with a guarantee on a new house.
Insurance CompaniesFirms that allow individuals and businesses to transfer risk for a fee. This creates a large pool of money known as a float that the insurance companies invest and pay out as claims are made.
Financial MarketsFirms that provide venues for commercial exchange such as a stock market, commodity exchange, bond market or foreign exchange market. Stock and bond markets play a critical role in funding investment that puts capital to work. Foreign exchange markets help to facilitate global trade and investment.
Secondary MarketA market that trades financial instruments that have already been issued. For example, a market that allows mortgage companies to sell their mortgages to investors as large packages.
Payment ProcessorsFirms that allow individuals and businesses to accept payments from customers. For example, a firm that provides a payment card that can be charged with cash or linked to a bank account.
NotesEach element of the global financial system is linked to a large number of counterparties. This creates a large interconnected and interrelated network. The obligations that exist between various financial entities are specified by contracts that can be complex and numerous. As such, the failure of one entity tends to reverberate across the network.
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