The Financial System in Modern Economy
Introduction
The financial system has the great role in the channels for the corporate sector and for the household savings in the allocation of the investment and the funds in to the firms. The financial system can also allow the smoothing for intertemporal consumption and to the expenditures and households of the firm while sharing the household and firm in sharing the risks. The aforementioned channels are the source that connects the financial structures and the financial development for the growth of economy (Allen and Oura, 2004).
Historically, the basis for the strong financial is commonly base on the strong republic that controls the expenditures and the public debt’s service. The key driver for the financial country’s revolution is the need for the finance wars. This also requires having the stable money that can serves the trusted and exchange for the value store. The banking system is also the factor for the strong republic for money and lending. The central bank is the one that supervisor and regulator for the financial system of the country as well as the executor of the financial and monetary for the promotion of growth and stability. The final component for the key financial system in modern time as the market security for the business enterprise and the finances government through the facilitation of the issue of the new securities can give liquidity for the trading market (Sylla, 2000).
The Importance of Sophisticated Financial System in Modern Economy
Most of the economist have the analytic usefulness on the construction of the differentiating the monetary and the real economy. This means that the modern economies are required for the sophisticated support of the system at the economy’s real side. Thus, the financial system is considered to be part as fundamental of modern economy. Though the financial system has no direct role that plays in the economy, it is still a powerful device for analytic measurement. This implies that each of the modern economy needs the requirements for sophisticated financial system in order to the support of the economy’s real side (Harwood et. al., 1999, p. 25).
There are several importances on the use of the sophisticated financial system in order to support for the real side of the economy. This importance is the fact that when the things go badly wrong in the financial side, then, they necessarily and precisely spill over antagonistically into the economy’s real side. The other factor is the fact that the financial system is intrinsically unstable. This can take too far afield in the development of the detailed thought. This implies that most of the lenders likes to have the liquid assets and wants something that they can mobilize quickly when they have to. The scenario is true and common in most of the purchaser of the bonds and stocks and to the depositors and the secondary market importance is the securities and the savers needs to be liquid (Ibid).
In saving and for the provision of producing the capital and funds in buying the capital goods and it can also abstain the current consumption and realize the resources that needed in producing the capital goods. For the modern economy, the sophisticated financial system as in the United States, the firms and the households can have the ability to channel the funds and the capital goods through saving the money for the various financial assets. In relation to this, most of the people buy the stocks and the bonds as they put the money in the saving account as well as to the retirement pension funds. These are all vehicles that can carry the funds from the savers and to the people and firms that buys the capital goods (Maclachlan, 1993, p.139).
As an example on use of sophisticated financial system and comprises to the large number of the diverse institution and the legal form for the specialized functions. The UK market, its financial industry can served as the evidence on the significant element of its entire economy and in term on eh measurement of GDP and to the entire employment. For the past 25 years, the country had recorded of having 1.7 million of the people that are engaged in providing the financial industry. On the other hand, the banking, business services, finance, and the leasing sector had known for having 8.4 percent of the entire GDP at its factor cost (Gilbody, 1989, p. 109).
Types of Banks and their Role in Financial System
There are many types of banks that play an important role in the financial activity and growth and to the development of economy. These types of banks includes following:
a. The commercial bank has the primary function of accepting the deposits as can mobilize it from the public. The deposits from the bank are mostly public preferred due to the fact that it can offer on the safety on their cash balances and it also yields the rate of the interest that idle balances. This deposit includes the current deposits, the fixed deposits, and the saving deposit. For the advance loans, it can give the resources for the banking operations and the loan advancement can give the monetary advantages in gaining to the bank with the aide of the charge of interest in loans. The commercial bank is commonly for the short term and it can be for the following forms as the ordinary loans, the over draft, discounting, and the cash credit. The other function of the commercial bank is the facilitation of the foreign trade. The commercial bank indeed is significant financial institution which can have the capacity for the lenders of the money and that will have the influence on the economic activity by the changes of interests (Chand, n.d., p.115).
b. The savings bank has the primary function of accepting the deposits. This bank also engaged in the medium and in operations of long term and medium term. This has also the control for the fixing the interest rate and clearing the house. This can also play as the States’ General Bank. There is a liquid claim for the depositor of the savings bank as well as having the small part of the liquid asset. Thus, savings bank renders for the financial services and to the information, the transmission, and to the data processing that goes with them (Mastropasqua, 1978, p. 44).
c. Investment Banking is covered by the areas as corporate finance it performs for the acquisition and mergers of the advisory or advising the side of corporate finance and underwriting or raising capital for the client. Other area is the sale wherein the salesperson and the brokers develops the investors in selling the stocks and manages also the large asset group as mutual funds and pension plans. The trading is other area as it facilitates the selling and buying for the stock, the other securities and the bonds. Lastly is research wherein the analysts follow the bonds and the stocks so that they can make recommendations on buying, holding or selling the securities. Generally, the investment banking is the raising for funds that can be use by the company (Vault Editors, 2006, p.130).
d. Merchant bank involve in the counseling, investment banking, and to negotiating the acquisition and mergers. The other roles of the merchant bank is the management for the securities portfolio of insurance, customers, foreign bill exchange acceptance, participating in the commercial venture, and in dealing to bullion. The deposits for the merchant bank are also negligible (Downes and Goodman, 2003 p.581).
e. The term lending account sale and purchase the financial securities for own accounts as well as the customers, the issuance of the letters and guarantees for the operations, the direct participation and investment, and the deposit that taken for the period of six months and above (Arab Invest, 20000.
F. The primary role of the development bank is advancing the credit for the new industrial enterprise as the policy of deliberate act, to the corrupted general banks’ commercial functioning and to the intention of development. This is the institution that search for the profit of the money (Cowen and Shenton, 1996, 363).
g. The foreign bank provide are engaged in the activities of general banking and are allowed to receive the checks to forward in the home office as well as handling into the signing of the loan papers. This foreign bank act as the coordinator between the domestic and the parent back. It also serves as the collecting and analyzing the data, information center and provides advice for the interested businesses in acquiring the specified information on the cultural affairs and the host-country. They also provide the analysis of the credit in the economic and local firms as well as to the political intelligence regarding the host country (Damanpour, 1990, p. 23).
h. Commonly, the universal bank is characterize by the function of investment-banking and allowed of raising the fund from the power plan and through the bank sale as in power plan securities and sale of bank. This can be the great agent for the allocation of risk and capital. The typical function of the universal bank is “house-bank” for having the maximum access into the information. This play as an active shareholder also in good times while debt-holder in bad times. (Gros and Steinherr, 2004, p. 156).
Central Banks and its Role in Financial System
Today, the central banking had been coped up with controls of the complex financial and monetary system. The primary function of the central is the issuance of notes. The central bank has the power in controlling the country’s supply of money. The note issued by the central bank is greater than its public confidence as compared to the commercial bank. The central bank can have the ability in increasing or decreasing the paper currency quantity in order to suit the economy’s varying needs. The central bank must control the system of banking through the cash ultimate source. As the note issue had been done by the central bank, it needs to maintain the stability of the external and the internal value of currency. This has also the apex institution which is better equipped with the information and personnel in solving for the complicated problems (Chand, n.d , p. 197).
The central banks are considered to be the most important feature for most of the countries’ financial system. This also takes the deposits from the government and to the other banks as deposited their gold reserves and their foreign exchange. The central bank also invests the reserves of the foreign exchange in its country while try to maintain the portfolio for the investment which are same to the composition of the client which is the state. The country’s central bank also holds its gold reserves and it also participates in the international negotiation. The central bank is the one responsible regulating and monitoring the interest rate of one economy as lend by the banking system (Vaknin, n.d.).
The central bank is the one that is meant for the promotion of the economic and the financial stability of the country. This is also an act for the public interest as well as the welfare for the country without considering the profit. This is not a profit hunting organization and not competitor for the banks; rather, it is a country’s monetary authority. Generally, the role of the central bank is that it serves as state’s banker, note issuer, and the banker’s bank. This also controls the credit while acting as the lender of the last resort and manages the exchange rate. Additionally, it is not only provides the aid for monetary in commercial banking, it is the one responsible for the control over the cost as well as the credit availability in the regulation and economy in the supply of growth of growth of the money (Chand, n.d., p. 280).
Conclusion
Based on the aforementioned facts, the bank plays major role in the modern economy. For the modern economy, the household and the firm can have the ability of having the access for the capital goods and funds by saving the money in the several financial assets. Buying the stocks also needs the banks when the stockholders are putting their money and the other financial resources to the saving accounts and to the funds. There are many options for the different accounts of savings that are suitable for the different banks. In connection, the b central bank is the responsible for the promotions of stability of the country and serves as the banker of country.
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