Understanding the Financial System: Key Concepts
What is the Financial System?
The financial system is a set of institutions, intermediaries, markets, and financial instruments. Its main objective is to channel savings from agents with financial surpluses to those with financial needs.
Elements of the Financial System
- Financial products (loans, shares)
- Financial markets (money markets, primary markets)
- Financial intermediaries (bankers, non-bankers)
What is a Financial Product?
Financial instruments are contracts that give rise to a financial asset in one company or entity and a financial liability or equity instrument in another.
Characteristics of a Financial Product
- Profitability: The ability of a financial instrument to produce income for its holder.
- Risk: The set of factors that may imply a different return than expected.
- Liquidity: The ability to convert a financial product into cash at the lowest possible cost.
Profitability, Risk, and Liquidity
A financial product will be more profitable the higher the risk assumed, but it will have little liquidity. Conversely, a financial product with a low return will have lower risk and higher liquidity.
What is a Financial Market?
Markets are the virtual or physical meeting places between those who offer financial instruments and those who demand them. They determine the terms of the exchange, mainly the price through the interest rate, and the amount.
Classification of Financial Markets
Financial markets are classified as follows:
By Maturity of Negotiated Products
- Money Markets: Products with a maturity of less than one year are traded.
- Capital Markets: Products with a maturity of more than one year are traded.
By Stage of Life
- Primary Markets: Financial products are sold and bought for the first time.
- Secondary Markets: Issued instruments are sold and purchased.
What is a Financial Intermediary?
Financial intermediaries connect people with financial needs with those who have financial surpluses.
They are classified as:
- Bankers: They issue financial products accepted as means of payment.
- Non-bankers: They issue financial products that are not used as means of payment.
EU Banking Institutions
- Eurosystem: The monetary authority of the euro area.
- European System of Central Banks (ESCB): Responsible for coordinating the monetary policy of all the central banks of the EU member states.
- European Central Bank (ECB): Establishes rules for national central banks to maintain price stability in the euro area.
Banking Sector Institutions in Spain
- Banco de España: Collaborates with European institutions and carries out the functions of the Eurosystem and the ECB within its territorial scope.
- Fondo de Garantía de Depósitos (Deposit Guarantee Fund): Guarantees up to 100,000 euros deposited per customer if a credit institution has solvency problems.
Functions of the Banco de España
- Promotes the smooth functioning and stability of the financial system.
- Monitors the solvency and compliance with regulations of credit institutions and financial markets.
- Prepares and publishes statistics related to its functions.
- Provides treasury and financial agent services for public debt.
- Advises the government, carrying out studies and reports.
Intermediaries Supervised by Banco de España
- Instituto de Crédito Oficial (ICO): A credit institution that also acts as a financial agency of the state.
- Financial Credit Institutions: Entities specializing in granting loans, generally able to carry out a wide range of financial asset transactions, but cannot take deposits from the public.
What is the CNMV?
The CNMV (Comisión Nacional del Mercado de Valores) ensures the transparency of the Spanish securities markets, the correct formation of prices, and the protection of investors.
What is the DGDSFP?
The DGDSFP (Dirección General de Seguros y Fondos de Pensiones) is an administrative body under the Ministry of Economy.
Five of its functions include:
- Responding to queries on private insurance and reinsurance.
- Financial supervision and inspection of the operations and activity carried out by persons and entities.
- The control of compliance.
- The supervision of the market conduct and practices of persons and entities.
- Coordination of relations in the field of private insurances and reinsurances.