Overview of the Financial System


Introduction. What Is a Financial System?. Financial Corporations. Deposit Takers. Special cases. Central Bank. Other Financial Corporations. Nonfinancial Corporations. Households. Nonprofit Institutions Serving Households (NPISHs). General Government. Public Sector. Financial Markets. Payment System. Real Estate Markets.


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2.1 As noted in Chapter 1, FSIs are calculated and disseminated for the purpose of assisting in the assessment and monitoring of the strengths and vulnerabilities of financial systems. Such assessments need to take account of country-specific factors, not least the structure of the financial system. Simply stated, whether an economy has a few or many banks, has diverse financial intermediaries, has a deep and liquid securities market, and whether the financial intermediaries have international operations, matters to any assessment. This chapter identifies and defines the main types of players and markets that typically constitute a financial system.

What Is a Financial System?

2.2 A financial system consists of institutional units 1 and markets that interact, typically in a complex manner, for the purpose of mobilizing funds for investment and providing facilities, including payment systems, for the financing of commercial activity. The role of financial institutions within the system is primarily to intermediate between those that provide funds and those that need funds, and typically involves transforming and managing risk. Particularly for a deposit taker, this risk arises from its role in maturity transformation, where liabilities are typically short term (for example, demand deposits), while its assets have a longer maturity and are often illiquid (for example, loans). Financial markets provide a forum within which financial claims can be traded under established rules of conduct and can facilitate the management and transformation of risk. They also play an important role in identifying market prices ("price discovery").

2.3 Within a financial system, the role of deposit takers is central. They often provide a convenient location for the placement and borrowing of funds and, as such, are a source of liquid assets and funds to the rest of the economy. They also provide payments services that are relied upon by all other entities for the conduct of their business. Thus, failures of deposit takers can have a significant impact on the activities of all other financial and nonfinancial entities and on the confidence in, and the functioning of, the financial system as a whole. This makes the analysis of the health and soundness of deposit takers central to any assessment of financial system stability.

Financial Corporations
Deposit Takers

2.4 The term "bank" is widely used to denote those financial institutions whose principal activity is to take deposits and on-lend or otherwise invest these funds on their own account. In many countries, "banks" are defined under banking or similar regulatory Page 12 legislation for supervisory purposes. In the Guide, banks and other deposit takers (other than central banks) are included within an institutional sector that is known as "deposit takers." 23 Deposit takers are defined as those units that engage in financial intermediation as a principal activity-that is, channel funds from lenders to borrowers by intermediating between them through their own account-and

- have liabilities in the form of deposits payable on demand, transferable by check, or otherwise used for making payments; or

- have liabilities in the form of instruments that may not be readily transferable, such as short-term certificates of deposit, but are close substitutes for deposits in mobilizing financial resources and are included in measures of money broadly defined.

2.5 Commercial banks, which typically take deposits and are central to the payment system, fall under the definition of deposit takers. These banks, which participate in a common clearing system, may be known as deposit money corporations. Other types of institutions that may be covered by the definition include institutions described as savings banks (including trustee savings banks, as well as savings and loan associations); development banks; credit unions or cooperatives; investment banks; mortgage banks and building societies (where their particular specialization distinguishes them from commercial banks); and microfinance institutions that take deposits. Government-controlled banks (for example, post office savings banks and rural or housing banks) are also deposit takers if they are institutional units separate from the government and they meet the definition of a deposit taker outlined in paragraph 2.6. This list is not exhaustive, and classification as a deposit taker depends on the function of the corporation, and not on its name.

2.6 Within an economy, the definition of deposit takers should encompass a group of institutions that meet the definition of banks and similar institutions under banking or other legislation, because like the statistical definition for deposit takers, a common legal criterion for a bank is the taking of deposits. If some institutions are banks in a legal sense but not deposit takers as described above, in following the Guide they should still be classified as "deposit takers," but in any associated description of the FSI data the status of these institutions should be explained, with some indication of their importance to the data disseminated.

2.7 Conversely, if there are any other groups of institutions that meet the Guide 's definition of a deposit taker but are not banks or similar institutions under the legislative approach, they should be separately identified so that their importance to the information disseminated can be judged.

2.8 As noted in Chapter 1 and described in more detail in Chapter 5, to meet analytical needs, deposit takers can be grouped on the basis of common characteristics. Two types of reporting populations are particularly identified in the Guide: domestically incorporated and controlled deposit takers, including any foreign branches and subsidiaries, and all domestically located deposit takers.

Special cases

2.9 Holding corporations are entities that control a group of subsidiary corporations and whose principal activity is owning and...

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