OVERVIEW OF

FINANCIAL SYSTEM
PREPARED BY:
JOHN MARK BIENVENIDO, BSA-III
MICHAELA MAE SABIANO, BSA-III
 INTRODUCTION OF FINANCIAL
SYSTEM
* A financial market or system is a market in which people and entities can
trade financial securities, commodities, and other fungible items . Securities
include stocks and bonds, and commodities include precious metals or
agricultural goods.
* A financial system is a complex, well-integrated set of sub-systems of financial
institutions, markets, instruments, and services which facilitate the transfer and
allocation of funds, efficiently and effectively.
Objectives of the financial system
The main objectives of this system are:
• To create a structured payment system
• To give money the time value as it deserves
• To reduce risks and compensate for the same through offering products and
services
• To enable the most efficient economic resource allocation
• To maintain market stability in the economic sector
 KEY SERVICES OF FINANCIAL
SYSTEM
• RISK SHARING
* Risk is the chance that the value of fifnancila assets will change to what one
expects. The splitting odf wealth to reduce risk is ca diversification. Rhe fiancial
sytem provides risk sharing by allowing savers to hold many assets.
• LIQUIDATION
* It is the ease with which an asset can be exchange into money. The financial
system increase the liquidity of assets through securitization.
• INFORMATION
* Financial system collects information about borrorwers, and expectation of
returns on financial assets. The incorporation of available information into asset
prices s also an important feature for financial markets.
 THE PROBLEM OF ADVERSE SELECTION AND MURAL HAZARD
• ASSYMETRIC INFORMATION
* Describes the situation in which one party to an economic transaction has better
information than the other party.
TWO PROBLEMS ARISING FRM ASSYMETRIC INFORMATION
1. ADVERSE SELECTION - the problem that investors experience in distinguishing
low-risk borrowers form high-risk borrowersbefore making an investment.
WAYS TO REDUCE:
* Require borrowers to disclose material information on their financial statements.
* Collecting information on firms and selling it to investors.
*Convince lenders to require borrowers pledge some of their assets as collateral
for non-payments.
• 2. MURAL HAZARD - the problem investors experience in verifying that the
borrowed funds are used at what it was intended to be.
WAYS TO REDUCE:
* Specializing in monitotring borrowers and developing effective techniques
to ensure that the funds they loan are used for their intended purpose.
* Imposing Restrictive covenants
 NATURE AND IMPACT OF TRANSACTION
AND INFORMATION COST
• TRANSACTION COST - the cost of trade. Ex: broker commision
• INFORMATION COST - cost incurred to determine the credit worthiness of
borrowers.
WAYS TO REDUCE:
* Economies of sale, rduction of average cost that results from an increase in a
volume of a good or service produced.
* Take advantage of economies of sale in other ways.
* Use of technology such ATM’s
* Use of sophisticated software to evaluate credit worthiness of loan applicants.
 THE END!
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