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Document on The Financial System

Added on - 16 May 2020

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qwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmrtyuiopasdfghjklzxcvbnmqwertyuiopasdfghjklzxcvbnmqwThe Financial System[Type the document subtitle][Pick the date]Desmond
ContentsPart A...............................................................................................................................................2Question1.....................................................................................................................................2Question 2....................................................................................................................................3Part B...............................................................................................................................................5Question 1....................................................................................................................................5Question 2....................................................................................................................................6Question 3....................................................................................................................................7Question 4....................................................................................................................................7
Part AQuestion1A financial system is the arrangement of all financial entities within a country or a society. Anyfinancial system consists of regulatory authorities (such as Monetary Authority of Singapore),financial intermediaries (such as Commercial Banks) and various stakeholders such asdepositors, investors, borrowers etc. A financial system also comprises of the instruments thatare used in the process of transactions. For example, currency, securities, Treasury bonds etc areexamples of instruments.[ CITATION Fra01 \l 1033 ][ CITATION Mon18 \l 1033 ]Figure1Financial System of Singapore : An OverviewSource: Prepared by Author. Adapted from[ CITATION Mon18 \l 1033 ][ CITATION Ewa14 \l 1033 ][ CITATION Fra01 \l 1033 ]Any Financial System primarily consists of Banking and Non Banking Financial companies asintermediaries as well as exchange markets as market places. For example, the Singapore CapitalMarkets serve as a market place for borrowers and lenders. These include the Stock Exchange,the Equity Capital Market exchange and Foreign Exchange markets.[ CITATION Mon18 \l 1033 ]Monetrary Authority of SingaporeBanking Sectore.g CommercialBanksOther Financial Companiessuch as Non- Banking FinancialCompanies, Financial Advisories,Insurance Companies etc.Capital MarketsEg Singapore Stock ExchangeEquity Capital MarketsForeign Exchange Markets
Figure2Role of Financial System. Adapted from[ CITATION Cla06 \l 1033 ][ CITATION Dou96 \l 1033 ]Financial intermediaries perform the function of monitoring and assignment of credit byaccepting deposits from depositors and channeling them to borrowers. In this process, the risksassociated with earning returns on assets are transferred to the banks and depositors do notnecessarily have to bear them.[ CITATION Cla06 \l 1033 ]Financial instruments help in creation of liquidity and credit creation. Financial intermediariesare able to provide loans based on the deposits made by depositors.[ CITATION Cla06 \l 1033 ]Inorder to attract depositors, interest is offered to individual and institutional depositors. Financialmarkets also, mobilize credit amonst themselves.[ CITATION Joh15 \l 1033 ]For example, banksmay borrow from whosesale markets in order to meet demand for credit in periods when there isnot enough liquidity to provide credit during high growth periods. Similarly, sturucturedfinancial instruments help package individual deposits into tradeable securities, therebyfacilitating credit creation.Financial intermediaries collect assets in the form of currency , securities etc. High risk assetscan be converted into lower risks assets due to the financial system. For example, a bond or aloan may be re-issued or re-secured. The maturity of the bond or the loan is extended. This isknown as the transformation of the risks characteristic of an asset.[ CITATION Cla06 \l 1033 ]Creation of Liquidity and Risk SharingActing as channel of savings and investmentActing as a channel of Credit, thereby promoting risk sharingReducing Information AssymetryFinancial systems collect and disburse information in the marketsAdverse selction is reduced due to this functionTransformation of Risk Characteristics of AssetsRisk characteristics of assets such as maturity dates can be transformed by financialsystems
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