How does the Financial System work?steemCreated with Sketch.

in blog •  3 months ago

The role of the financial intermediaries of the opening when the subjects with the surplus of savings open the way to financing. The primary assets issued by the borrowers are directly absorbed by the final savers. The latter being in their funds to financial entities.

A financial system is constituted by the set of institutions that mediate between the plaintiffs and the bidders of financial resources and includes all the financial flows between the subjects and the economic sectors.

The financial system was born as a response to a demand for resources for productive and consumer purposes, supported by institutional support in a series of specialized intermediaries. ** A financial intermediary is an institution that is between lenders and borrowers ** Borrow and lend funds to borrowers. The importance of the financial system is due to the fact that, although some of the possible financial flows flow directly from the subjects with excess savings to those who demand financing to carry out their investment or consumption projects, the most important part of them it goes through an indirect path, that is, it passes through certain entities, the financial intermediaries, which capture savings to lend it again.

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We think that when the connection between the bidder and the claimant of financing is direct, it implies that the saver assumes the risk of not recovering the savings that he / she provides. In addition, in general, the saver does not have a sufficient degree of specialization to analyze the safety of the operation. The uncertainty of being able to cancel the loans without suffering losses will greatly limit the possibilities of this connection. This limitation is eliminated, to a large extent, thanks to the work of financial intermediaries.

The basic function of financial intermediaries is to transform the primary assets, that is, those issued by the economic units of expenditure, into indirect assets, that is, those created by financial intermediaries.

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A company when issuing obligations financial assets can be acquired by savers or financial intermediaries. These assets will generally have lower profitability, although they will enjoy greater liquidity and security. Their importance lies in the fact that their acceptance by the last savers allows financial intermediaries to obtain the resources to exercise their mediating activity.

The difference in profitability between primary and indirect financial assets is what allows the existence of financial intermediaries. Thus, for example, the interest a bank charges for the loans and loans it grants is higher than the interest it pays for the deposits it receives. With the difference, which is called the intermediation cost or margin, it covers the expenses and obtains benefits.

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Financial flows are the result of the financial imbalances of the subjects and economic sectors. </ span> It should be noted, however, that regardless of the capacity or need for financing, financial flows will also occur if the subjects or economic sectors decide to change the composition of their financial assets. Thus, any economic agent may think that certain assets, for example deposits, are unprofitable or that certain stocks offer poor prospects and, consequently, decide to alter their portfolio of securities by reducing the amount that is deposited in sight and placing it on time.

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