Financial system
The financial system ( english finance system ) is in the economy , a system that the cash flows between payers and payees organized and from financial intermediaries , financial markets , infrastructure and financial market supervision composed.
General
Financial systems are part of the financial economy , they exist on different levels. They exist globally ( global financial system ), nationally (especially financial equalization , financial markets, interbank trading , payment systems ) and regionally and from a microeconomic point of view at the level of one or more companies ( cash management ). Financial systems include the instruments, institutions, markets and rules that monitor market behavior in cash flows between buyers and sellers and between savers and lenders .
According to Hans Büschgen , a financial system can be understood to mean the banking system and the financial intermediaries, according to the Bundesbank , the financial markets and the financial infrastructure for payment transactions and securities processing . The financial sector in turn includes all institutions and systems that provide financial services to an economy . These include in particular financial markets and financial intermediaries ( credit institutions , insurance companies , etc.).
Legal issues
According to Art. 2b Regulation (EU) No. 1092/2010 of the European Parliament and of the Council of November 24, 2010 (ESRB Regulation) , the financial system includes “all financial institutions , financial markets, financial products and financial market infrastructures”. The term financial system is a legal term according to Section 1 (33) of the KWG , but is not defined there, but rather has the purpose of describing disruptions with serious negative effects on the financial system and the real economy as part of a systemic risk.
organization
Financial systems ensure the smooth exchange of trading objects such as financial instruments , financial contracts , financial products , means of payment or payments . The task of the financial system is to enable payment flows between market participants and to facilitate the exchange of financial resources between surplus and deficit subjects. This exchange takes place through market participants in the financial markets. The financial markets include stock exchanges , money , foreign exchange and capital markets . These markets are subject to a market organization that is more or less intensively monitored by state market regulation . Basically, is the offer , the demand compared to that by the market price an equalizer. Not all trading objects are always available; there can be different market depths in sub-markets . Important state institutions in the financial system are the central banks , supranational banks (e.g. the World Bank , international development banks with a regional field of activity, the Bank for International Settlements ), the International Monetary Fund and various supervisory authorities (e.g. the Federal Financial Supervisory Authority ).
Financial systems are an essential instrument for the social organization of the distribution of wealth , values and wealth . The organization of the distribution of social wealth is historically and culturally and according to the respective social order and its ideas of a "fair" distribution very different. Larger differences exist in the question of the permissibility of interest rates , trading strategies , taxation , distribution and assessment according to social affiliation and the market access of market participants.
- International
The ideal organizational form of a financial system is controversial. The financial systems of the industrialized countries differ considerably in their design. While the USA and the UK have a greater importance of the capital market ( capital market-based financial systems ), Germany and all other EU member states as well as Japan prefer to a greater extent financial intermediaries ( bank-based financial systems ). The advantages of bank-based systems are the good monitoring options that arise from the relatively close relationship between bank customers and their house banks . This allows corporate governance problems that are based on asymmetrical information to be solved more effectively than with many individual creditors . In contrast, in a bank-based system there is a risk that the house banks will abuse their power if they are not subject to power control.
- Germany
The German financial system is bank-based with a large number of universal banks and specialist banks that provide all economic subjects with financing . We can observe an increasing capital market orientation for large companies and also for small and medium-sized companies . A special feature is the three-pillar model made up of public ( savings and regional banks ), cooperative banks and private banks .
Systemic risk
The risk of market disruption or failure is latent in financial systems. That is why a financial market supervisory authority is installed in financial systems. In modern financial systems, systemic risks are monitored by the financial intermediaries themselves ( risk management , crisis management , crisis prevention ) and by banking supervisors. For example, Section 1 (33) of the KWG defines systemic risk as “the risk of a disruption in the financial system that can have serious negative effects on the financial system and the real economy”.
Art. 2c ESRB-VO defines systemic risks as “risks of an impairment of the financial system which contain the potential of serious negative consequences for the internal market and the real economy”. All types of financial intermediaries, markets and infrastructures can potentially be of systemic importance to some extent. Systemic risk is therefore characterized by the fact that it does not stop at the instability of the financial system, but rather that the risk spreads to other systems such as the real economy.
Function of the financial system
The most important functions of the financial sector are the monetary function , the steering function (allocation function), i.e. the mediation and coordination of the flow of financial resources between lenders ( creditors ) and borrowers ( debtors ), and the insurance function (diversification function), i.e. the reduction of the transfer of financial resources Means associated risk.
Steering function (allocation function)
The financial system coordinates the flow of funds from lenders to borrowers. Lenders are, for example, households that are in the wealth accumulation phase and are not consuming all of their current income. The savings can later be used to make major purchases or to make provisions for old age. Borrowers are, for example, companies that finance investments , private households that finance a home or consumer wishes, or local authorities that have to offset a budget deficit with debt . Via the market price ( interest ) that has to be paid for the temporary transfer of financial resources, the savings are channeled into those uses that promise the greatest expected real return .
Insurance function (diversification function)
Instead of investing the entire savings in individual projects, lenders can invest their savings in many different uses so that they can benefit from the ideas and productivity of others and are less affected by negative developments in individual industries or regions. In turn, both lenders and borrowers benefit from the risk reduction . Lenders are generally assumed to be risk averse , which means that they prefer safe investments (with less dispersion of results) to unsafe investments with the same expected return . Risk-averse investors only make their savings available for risky projects if they are rewarded with an appropriate risk premium for taking on the risk. If the average risk can now be reduced by dividing the savings into many uses, then the risk premiums are also lower.
Structure of the financial system
A functioning financial system is of vital importance for the development and economic growth of an economy. There is good empirical evidence that the availability of financial resources for private borrowers has a positive impact on a country's average real per capita income . The availability of financial resources encourages investment and technological progress. In addition to the mere availability of financial resources, the efficiency of the financial system is also important.
Control and access to information
In Germany, the financial services supervisory authority is responsible for controlling the financial sector , specifically BaFin . The Federal Freedom of Information Act ( IFG) and the German Banking Act (KWG) regulate the extent to which the right to access files is granted . The financial systems of the EU member states are monitored by the European Central Bank and the European Banking Authority.
economic aspects
The stability of financial systems is of considerable importance for market participants and the entire economic system. Stability is a term used in equilibrium theory and describes a system in which, starting from any starting point, "a market equilibrium " works itself out ". When the stability of the financial system is mentioned, it is not this equilibrium concept that is meant, but rather the functionality . A financial system is stable and functional when the financial relationships between economic entities run smoothly. A financial system, on the other hand, is unstable if a systemic crisis - such as a financial crisis or an economic crisis - is present. A system crisis occurs when a malfunction significantly affects the functionality of the system.
Internationalization of financial trading
The entirety of the national financial systems and their interaction is also known as the global (international) financial system . In addition, states also appear here as international creditors and debtors ( international credit transactions ).
An increasing international integration of financial trading can be observed since around 1980. International financial trading takes place, for example, when a private investor from the USA buys German corporate bonds or when a German bank buys Russian government bonds . Financial integration can be measured using various criteria. The volume of cross-border securities transactions (fixed-income securities and shares) between the USA, Germany and Japan, for example, rose from an average of 15 percent of the respective gross domestic product in the years 1975–1979 to almost 600 percent in the years 1995–2000. Since 1990, capital flows from industrialized countries to emerging and developing countries have increased significantly, but the majority of financial transactions still take place between industrialized countries.
The increase in the importance of international financial transactions is also evident in the ratio of global foreign exchange and export sales. In 1979, world foreign exchange sales were $ 17.5 trillion, while world exports were $ 1.5 trillion. That corresponded to a ratio of 12: 1. In 1998 this ratio was 69: 1 (foreign exchange: $ 372 trillion, exports: $ 5.4 trillion). However, even today, intra-national trade on goods and financial markets is still much more important than international trade.
Entrepreneurs with profitable projects can go into debt overseas if domestic savings are insufficient to fund all profitable domestic investment projects. The latter is theoretically to be expected for emerging and developing countries. There the productivity of additional capital is particularly high because the public infrastructure and the private real capital stock are at a relatively low level.
As actors in the global financial system there are the International Monetary Fund (IMF) and the World Bank . The following tasks are assigned to the IMF: promotion of international cooperation in monetary policy , expansion of world trade , stabilization of exchange rates , lending, monitoring of monetary policy or technical assistance.
literature
- Stephen G. Cecchetti: Money, banking, and financial markets . 2nd edition. McGraw-Hill Irwin, Boston 2008, ISBN 978-0-07-128772-2 .
- Joseph P. Daniels and David VanHoose: International monetary & financial economics . 2nd edition, South-Western Thomsom Learning, Mason 2002, ISBN 0-324-06362-8 .
- Peter Howells and Keith Bain: The economics of money, banking and finance. A European text . 4th edition, Financial Times Prentice Hall, Harlow 2008, ISBN 978-0-273-71039-4 .
- Frederic S. Mishkin: The economics of money, banking, and financial markets . 7th edition. Pearson Addison-Wesley, Boston 2004, ISBN 0-321-20463-8 .
Individual evidence
- ^ George G Kaufman, The US Financial System: Money, Markets, And Institutions , 1992, p. 4
- ↑ Kersten Höft, Criminal Law Processing of the Financial Crisis , 2018, p. 39 FN 26
- ↑ Deutsche Bundesbank, Geld und Geldpolitik , 2012, p. 83
- ↑ Christoph Deutschmann (ed.), The social power of money , 2002, p. 144
- ↑ Franz Flögel / Stefan Gärtner, Space and Banks: On the Functioning of Regional Banks , 2017, p. 73
- ↑ Christian Baumeister, Cross- Company Financing in Value Creation Networks , 2015, p. 112
- ↑ Horst Gischer / Bernhard Herz / Lukas Menkhoff, Geld, Kredit und Banken , 2004, p. 2 ff.
- ↑ Oliver Holtemöller : Monetary Theory and Monetary Policy . Mohr Siebeck / Tübingen, 2008, ISBN 978-3-16-148525-1 . Chapter 4.4.
- ↑ Jochen Schumann , Microeconomic Theory , 1987, p. 185
- ↑ Stefan Prigge, Zentralbank, Share Price Fall and System Crisis , 1997, p. 8
- ↑ Stefan Prigge, Zentralbank, Share Price Fall and System Crisis , 1997, p. 8
- ↑ OECD , Systemic Risk , 1991, Item 26 f.
- ↑ International Monetary Fund: World economic outlook. Trade and finance . Washington, September 2002, p. 110 ff.
- ^ Robert Merton Solow : A contribution to the Theory of Economic Growth . In: Quarterly Journal of Economics , Vol. 70, 1956, pp. 65-94. The 'Lucas paradox' can also be observed empirically, i.e. the opposite direction of capital flows: Robert E. Lucas : Why doesn't capital flow from rich to poor countries? . In: American Economic Review, Vol. 80, 1990, pp. 92-96
