Introduction to Money

and the Financial System

Matt Ysrael P. Vicedo
Instructor
Department of Management
 What you will learn today?

• Every financial transaction has a story.

• There is a complex web of interdependent institutions and
markets making up the foundation of daily financial
transactions.
• The Six Parts of the Financial System.
• The Five Core Principles of Money and Banking.
 WHAT IS FINANCIAL SYSTEM?
A financial system is a system that allows the exchange of funds
between financial market participants such as lenders, investors, and
borrowers. Financial systems operate at national and global level.
The financial system also includes sets of rules and practices that
borrowers and lenders use to decide which projects get financed, who
finances projects, and terms of financial deals.
PARTS OF THE FINANCIAL SYSTEM
1. Money
• Money is understood to be anything that is accepted for
payment of products and services or for the repayment of debt.
It is a medium of exchange and acts as a store of value.
PARTS OF THE FINANCIAL SYSTEM
2. Financial instruments
• A financial instrument is defined as a contract between
individuals/parties that holds a monetary value. They can either
be created, traded, settled, or modified as per the involved
parties' requirement.
• Some examples of financial instruments are cheques,
shares, stocks, bonds, futures, and options contracts.
PARTS OF THE FINANCIAL SYSTEM
3. Financial Markets
• Financial Markets include any place or system that provides
buyers and sellers the means to trade financial instruments,
including bonds, equities, the various international currencies,
and derivatives. Financial markets facilitate the interaction
between those who need capital with those who have capital
to invest.
 PARTS OF THE FINANCIAL SYSTEM
4. Financial Institutions
• Financial institutions facilitate smooth working of the financial system
by making investors and borrowers meet. They mobilize the savings of
investors either directly or indirectly via financial markets, by making use
of different financial instruments as well as in the process using the
services of numerous financial services providers. Central banks, retail
and commercial banks, credit unions, savings and loan associations,
investment banks and companies, brokerage firms, insurance companies,
and mortgage companies are some examples of financial institutions.
PARTS OF THE FINANCIAL SYSTEM
5. Government regulatory agencies
• Regulatory agencies are defined as governmental or
quasi-governmental bodies that establish, monitor, and
enforce laws within their area of responsibility. In most
cases, a regulatory agency is created by a legislature to
enforce or implement laws that have been passed and
signed into law.
PARTS OF THE FINANCIAL SYSTEM
6. Central banks
• Central bank is regarded as an apex financial institution in the
banking system. It is considered as an integral part of the economic
and financial system of a nation. The central bank functions as an
independent authority and is responsible for controlling, regulating
and stabilizing the monetary and banking structure of the country.
6 PARTS OF THE FINANCIAL SYSTEM
1. Money
To pay for purchases and store wealth.
2. Financial Instruments
To transfer resources from savers to
investors and to transfer risk to those
best equipped to bear it.
3. Financial Markets
To buy and sell financial instruments.
4. Financial Institutions
To provide access to financial markets,
collect information & provide services.
5. Regulatory Agencies
To provide oversight for financial system.
6. Central Banks
To monitor financial Institutions and
stabilize the economy.
 CORE PRINCIPLES OF
MONEY & BANKING
A. Core Principle 1: Time has value.
• Time affects the value of financial instruments.
• Interest is paid to compensate the lenders for the
time the borrowers have their money.
 CORE PRINCIPLES OF
MONEY & BANKING
B. Core Principle 2: Risk requires compensation
• In a world of uncertainty, individuals will accept risk
only if they are compensated.
• In the financial world, compensation comes in the
form of explicit payments: the higher the risk the
bigger the payment.
 CORE PRINCIPLES OF
MONEY & BANKING
C. Core Principle 3: Information is the basis for
decisions
• The more important the decision, the more
information we gather.
• Collection and processing of information is the
foundation of the financial system.
 CORE PRINCIPLES OF
MONEY & BANKING
D. Core Principle 4: Markets determine prices and allocate
resources.
• Markets are the core of the economic system.
• Markets channel resources and minimize the cost of gathering
information and making transactions.
• The better developed the financial markets, the faster the country will
grow.
 CORE PRINCIPLES OF
MONEY & BANKING
E. Core Principle 5: Stability improves welfare.
• A stable economy reduces risk and improves everyone's
welfare.
• A stable economy grows faster than an unstable one.
 5 CORE PRINCIPLES OF
MONEY & BANKING
1. Time has value.
2. Risk requires compensation.
3. Information is the basis for decisions.
4. Markets determine prices and allocation resources.
5. Stability improves welfare.
• Very few pieces of information are needed to steal your
identity.
• Protect your personal information.
• Never tell your birth date, birthplace, address, mother’s maiden
name.
• Guard your Social Security Number.
• Monitor your financial statements closely.
End of this module.