Contemporary Finance

1Functions and Structure of the Financial System

1.1 Functions of the Financial System

Finance is a human activity that deals with planning for the future. The financial sector of the economy is made up of markets in which promises of future payment are issued and assets are traded, the people and the firms making and assisting with these claims and exchanges, and the specialized facilities through which trading and other functions are carried out. It is embedded in a larger economic system shaped in part by how law and institutions, ranging from corporate organization to government regulations, have emerged historically. Finance is an important contributor to overall economic efficiency. Regions with developed and well-functioning financial systems tend to have higher economic growth.

The financial system carries out a number of functions aimed at improving the allocation of resources over time, between firms, and geographically, under conditions of constant change and profound uncertainty. It gathers resources from savers or lenders and transfers them to investors or borrowers, enabling people to defer consumption into the future and move resources to other places. Savers include households or firms with a surplus or resources; investors are households or firms using the resources to add to society’s capital stock, including machines, supply chain organization, education, and consumer durables. The financial system helps people plan for the future, identify risks, and insure ...