how a financial system works
like any other industry the financial system can be organized using markets central planning or some mix of both financial markets involve borrowers lenders and investors negotiating loans and other transactions in these markets the economic goods traded on both sides are usually some form of money current money cash claims on future money credit or claims on the future income potential or value of real assets equity these also include derivative instruments derivative instruments such as commodity futures or stock options are financial instruments that are dependent on an underlying financial asset s performance in financial markets these are all traded among borrowers lenders and investors according to the normal laws of supply and demand the approximate total market capitalization of the u s stock market in 2024 1in a centrally planned financial system e g a single firm or a command economy the financing of consumption and investment plans is not decided by counterparties in a transaction but directly by a manager or central planner which projects receive funds whose projects receive funds and who funds them is determined by the planner whether that means a business manager or a party boss most financial systems contain elements of both give and take markets and top down central planning for example a business firm is a centrally planned financial system with respect to its internal financial decisions however it typically operates within a broader market interacting with external lenders and investors to carry out its long term plans at the same time all modern financial markets operate within some kind of government regulatory framework that sets limits on what types of transactions are allowed financial systems are often strictly regulated because they directly influence decisions over real assets economic performance and consumer protection financial market componentsmultiple components make up the financial system at different levels the firm s financial system is the set of implemented procedures that track the financial activities of the company within a firm the financial system encompasses all aspects of finances including accounting measures revenue and expense schedules wages and balance sheet verification on a regional scale the financial system is the system that enables lenders and borrowers to exchange funds regional financial systems include banks and other institutions such as securities exchanges and financial clearinghouses the global financial system is basically a broader regional system that encompasses all financial institutions borrowers and lenders within the global economy in a global view financial systems include the international monetary fund central banks government treasuries and monetary authorities the world bank and major private international banks who runs the u s financial system there s no single institution or individual that runs the u s financial system one of the most powerful agencies overseeing the financial system is the u s federal reserve which sets monetary policy to promote the health of the economy and general stability other notable agencies involved in overseeing the financial system include the federal deposit insurance corporation fdic which insures deposits at banking institutions and the securities and exchange commission sec which regulates the stock market 