BASIC ELEMENTS OF THE FINANCIAL SYSTEM:

Financial System
- institutional mechanism established by society to produce and deliver financial-
services and allocate resources
- consisting of the business firms supplying financial services
- government regulatory authorities that enforce the rules prevailing within the
financial sector
Functions of Financial System
- Credit
- mechanism of borrowing funds from another sector
TYPES OF BORROWERS
- consumers
- business
- government
- Payment
- takes the form of currency, checks, bank transfer, etc.
- can be done electronically
- Money creation
- BSP (Bangko Sentral ng Pilipinas) is primarily responsible in creation of
money in PH
- facilitating the other use of currency through payments
CREATING MONEY:
- Old basis: Gold and Silver, "BULLION"
- New basis: Resources of a country, labor, people, financial and
natural resources
- Savings
- "surplus"
- means of accepting deposits and loans through financial institutions
Components of a Financial System:
- Financial Instrument
- Financial Sector - flow of currency through other sectors
- Financial Markets
- Financial Institutions
- Rules Governing the Conduct of Trade
- designed to be intact and to function well
Financial System and Flow of Funds *check photos for the table*
*wages, dividends, interests, purchases, taxes, savings, lending
- Firms
- Households
- income comes from firms (INCOME) and used for necessities
(EXPENSES)
- firm's salaries for labor (EXPENSES) and consumers buy to firms
(INCOME)
 - excess funds >> FINANCIAL SYSTEM
- lending >> FINANCIAL SYSTEM
- Financial System
- Borrowing >> FIRMS
- Investment Expenditure >> FIRMS
- Government
Relationship between Household Income and Spending at Various Stages
Stages in Life Cycle of the Household, Income, and Financial Decisions
- New
- smaller than expenses
- spends savings or borrow
- Middle Age
- bigger than expenses
- build up savings and liquidate borrowings
- Retirement
- smaller than expenses
- spend savings
Transferring Funds from Lenders to Borrowers
- Lenders SSU (Surplus Spending Units)
- individuals in which incomes are greater than expenditures
- savings >> Borrowers DSU
- Borrowers DSU (Defecit Spending Units)
- individuals in which expenses are greater than income, usually
households
- return/interest >> Lenders SSU
Methods of Financing
- Direct Financing
- lending by ultimate borrowers with no intermediary
- SSU gives money to DSU in exchange for financial claims on DSU
- Indirect Financing
- also known as FINANCIAL INTERMEDIATION
- refers to lending by the ultimate lender to a financial intermediary that
then relends to ultimate borrowers
Categories of Financial Intermediaries
1. Depository Intermediaries
- sources of funds consists of deposits received from businesses,
households, and governments
- commercial banks, credit unions, savings and loan association, and
savings banks
2. Contractual Intermediaries
- enter into contracts with their customers to promote savings or financial
protections against loss of life or property
 - consists of life and nonlife insurance companies, GSIS, SSS, private
pension funds, and educational plan companies
3. Secondary Intermediaries
- conducts general insurance but, not as their main business activity
- depend heavily on other financial intermediaries like commercial banks
for loanable funds
- finance companies, mortgage banks, real investment trusts
4. Investment Subsidiaries
- offers the public securities that can be held indefinitely as a long term
investment and which can be quickly sold when the customer
needs his funds returned.
- includes mutual stock funds, bond funds, money market funds
Financial Intermediaries and Their Sources of Funds
Types of Intermediary Source of Funds
Commercial Banks Deposits
Savings and Loan Association Deposits
Mutual Savings Banks or cooperative Deposits
Credit Union Deposits
Life Insurance Companies Premium from policyholders
Nonlife insurance companies Premium from policyholders
Pension fund companies , GSIS, SSS Employer and employee contributions
Finance Companies Issues of commercial paper, stocks,
bonds
Mutuals Funds Issues of shares
Money market mutual funds Issues of shares