Chapter 5.

Functions of financial system

The financial system has a multifaceted nature; the following functions of
the financial system are distinguished:
- distribution, covering the movement of economic resources in time and space;
- regulatory, including financial regulation of the economy, management of risks of
economic activity and liquidity of financial assets, reduction of distribution costs,
provision of optimal methods for making settlements;
- mobilization, ensuring the accumulation of savings;
- control, involving control and monitoring of cash income and funds;
- informational, aimed at easing informational asymmetries.
Description of the functions of the financial system
A key function of the financial system is distribution.
The distribution function of the financial system is manifested in the process of
distribution and redistribution of gross domestic product, between its various
economic entities, of its most important component - national income, part of
national wealth, as well as external receipts in the form of external government
loans, foreign investments, other interstate transfers and is realized through the
transfer of financial resources in time and space.
The regulatory function of the financial system shows in which direction the
redistribution of financial resources occurs, the formation of reproductive, sectoral
and territorial proportions. Its action is aimed at ensuring a steady pace of socio-
economic development by using financial methods and tools of macroeconomic
regulation, managing the risks of economic activity and the liquidity of financial
assets, implementing cost-effective projects, and providing optimal methods for
making settlements.

In terms of managing the risks of economic activity, the regulatory function of the
financial system provides an opportunity for subjects of economic relations to
reduce the risks of their activities by attracting the services of specialized
institutions and financial market instruments. Institutions that take on these risks
use various forms and methods of risk management, corresponding to their role in
the financial system. The main institutional element of the financial system that
ensures the implementation of this function is traditionally insurance companies,
which, by agreement of the parties, take risks and pay for insurance claims.
State extrabudgetary funds that solve the problems of ensuring social protection of
the population use methods of redistributing national income in favor of
unprotected social groups. Investment companies that manage cash funds
contribute to the diversification of investors' risks while maintaining and increasing
investments, etc. To manage risk, methods such as insurance, diversification and
hedging are used, as well as a range of techniques that allow you to transfer the
risk, prevent or compensate for the damage, avoid the risk in whole or in part.
The regulatory function of the financial system in terms of managing the liquidity
of financial assets provides the ability to change the form of a financial asset
depending on the requirements of the economic entity to the degree of its liquidity.
Different categories of financial assets circulating in the market have different
levels of liquidity. It is known that money has the greatest liquidity. Shares are
considered less liquid than bonds; long-term securities - less liquid than short-term
ones; corporate securities - less liquid than government securities.
Currency, securities, precious metals ensure the circulation, storage and
accumulation of financial assets, as well as the efficiency of their use. The
implementation of the considered function contributes to the choice by economic
entities of the most appropriate forms of storage and use of their financial assets,
reducing time and simplifying business operations.
The regulatory function of the financial system contributes, among other things, to
the implementation of cost-effective projects by selecting acceptable methods and
sources of financing. The effectiveness of the project largely depends on the model
of its financing. The choice of methods and sources of financing is determined by a
number of factors, and above all, the degree of accessibility of certain sources of
financing, their cost.
The regulatory function of the financial system provides economic entities
implementing the project with the opportunity to choose the optimal financing
model, which assumes the best combination of financing methods and sources
while minimizing the weighted average cost of financial resources.
The control function of the financial system involves control and monitoring at all
stages of the formation and use of cash income and funds and objectively reflects
the distribution process. It is manifested in the control of compliance with the law,
the distribution of gross domestic product, part of the national wealth, external
revenues, as well as the expenditure of financial resources for their intended
purpose.
Financial control is aimed at ensuring the development of production, accelerating
scientific and technological progress, improving the quality of work in all spheres
and sectors of the economy, stimulating, rational and lean spending of material,
labor, financial resources and natural wealth, reducing unproductive expenses and
losses, suppressing mismanagement and waste .
The mobilization function of the financial system provides the opportunity to
generate savings, accumulate wealth and income. It is implemented through the
accumulation of capital and its accumulation with the help of financial institutions
in the interests of market participants and society as a whole. This function allows,
through accumulation, to counteract inflation and crisis processes in the economy,
to ensure the stability and liquidity of the national currency, and to form resources
for their further investment.
The broad financial information function, which is performed by the financial
system, contributes to the adoption of optimal decisions by economic entities due
to information support.
Information is an important factor determining the direction of movement of
financial resources. Such information includes interest rates, exchange rates, stock
prices, stock market indices, prices, tariffs, etc. Thus, the dynamics of interest rates
in the financial markets is an indicator of economic development, indicating its
general trend, and the market valuation of certain assets - a key tool to minimize
the risks of operations associated with the movement of capital.
A detailed analysis and accounting of financial information contribute to the
adoption of economic decisions by economic entities, the effectiveness of which is
largely due to the completeness, reliability and timeliness of this information.
However, the information is imperfect, in addition, its asymmetry is generated by
the actions of the economic entities themselves. In this regard, the activities of the
infrastructural institutions of the financial system can simplify the process of
obtaining and processing information for all participants in economic processes
and thereby reduce the level of information asymmetry.