Financial System

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  • A system in which there is interaction among financial institutions, policymakers, savers, and borrowers. Financial institutions are interme diaries that facilitate the interaction of surplus spending units (savers or investors) and deficit spending units (borrowers) in financial markets. In an effective financial system, policymakers ensure the smooth operation of financial institutions by promulgating rules and laws and ensuring adherence to regulations to prevent the collapse of the financial system. The major policymakers of a financial system are the lawmakers and the central monetary authorities of a nation.

    Financial institutions consist of depository institutions (banks), contractual organizations (insurance companies), securities firms (investment companies, investment banks, and brokerage firms), and finance firms (finance companies, including mortgage banking firms). Apart from the regulatory, supervisory, and administrative role of ...

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