Q:

What are the elements of a financial system?

A:

Quick Answer

The six elements of a financial system are: lenders and borrowers, financial intermediaries, financial instruments, financial markets, money creation and price discovery. The financial system primarily concerns itself with borrowing and lending.

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Full Answer

Lenders and borrowers come from the household sectors, business or commercial sectors, government sector or foreign sector. This group is the group who undertakes the borrowing and lending process. The financial intermediaries are in place because of the financial conflict between borrowers and lenders, such as the term of the borrowing agreement and the risk financial institutions take when lending money. Financial intermediaries help by creating policy and payment systems.

The financial instruments are debt instruments and stock and share instruments. The instruments of the household sector include a mortgage loan or an overdraft loan from a bank, while instruments in the commercial sector include Treasury bills, corporate bonds and T-bonds.

Financial markets include the debt market, the money market and the bond market. Money creation is a huge part in the financial system. Money creation helps with determining the interest rates, inflation rate, the value of income-property assets and the value of any financial instrument. Price discovery is determined by the overall supply and demand of credit.

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