The financial system is a multiple and complex concept. What makes it even more complicated is the fact that it should properly function worldwide. Since financial institutions provide the majority of financial services they are considered to be the core element of the global marketplace.
The definition of financial institutions
By the term “financial institutions”, one can understand such establishments as banks, insurance organizations, stock or bond markets, and others. Primarily, they are made to regulate the relationships between those who save funds and those who can offer different investment opportunities. Naturally, all financial institutions should be controlled by the government.
The importance of stock markets
The functions of such institutions as stock markets and equity securities are necessary for the financial system and global marketplace because they help to control liquidity and regulate price changes. Besides, they also provide investors with saving opportunities and funds for financing purposes.
Comparison of stock markets and bonds markets
However, those institutions are not the primary source of external funds for business, although mass media often make people think this way. The survey has shown that bonds, for example, are more valuable in business financing than stocks, at least in the United States. The percentage of funding contributed by stocks is only 11% while bonds’ contribution is three times higher (Mishkin & Eakins, 2012). Nevertheless, stocks and bonds together make nearly half of all funding that is still strong enough. Finally, this fact is true not only in the United States but all over the world. Most other countries have an even smaller share of stocks and bonds funding (Mishkin & Eakins, 2012).
The difference between direct and indirect funding
Even though, indirect financing happens to be much more important and demand than direct one. Indirect financing implies the activity of the organization that plays a role of a middleman. Such organizations are usually called financial intermediaries. Since only big and well-developed companies have access to the funds of securities markets, small firms and organizations, as well as individuals, can only finance their business with the help of financial intermediaries, particularly banks. Besides, the intermediaries can also offer some benefits to small savers, reducing transaction costs in the stock or bond market. Otherwise, those costs are rather high.
The primary source of business funding
According to all mentioned above, insurance organizations, banks, and other financial intermediaries are considered to be the most important source of funds for activities. It is also confirmed by statistics. In such countries as Canada and the United States, loans made by financial intermediaries are a bit more than 50%, in Germany and Japan it is 70% (Mishkin & Eakins, 2012). As for the developing countries, this value is even higher.
Finally, banks and nonbank organizations are rather important for the global marketplace because they are involved in a lot of financial activities, including insurance, securities selling, raising advice, and others.
So, although all financial institutions are different, and some of them are more in demand than others, all of them play a crucial role in the global marketplace. Without only one component, the whole system will not be able to function normally.
Reference
Mishkin, F. S., & Eakins, S. G. (2012). Financial markets and institutions (7th ed.). Boston, MA: Pearson Education.