How the Financial System Works

Описание: The financial market functions as the global economy's circulatory system, a complex and interconnected network of institutions, instruments, and infrastructure designed to mobilize savings from agents with surplus capital and allocate them to those requiring funds for investment, consumption, or production. This architecture operates through primary markets, where new securities are issued to raise capital, and secondary markets, which facilitate liquidity and price discovery by allowing investors to trade existing assets. At its core, the system relies on intermediaries—ranging from traditional commercial banks that engage in fractional-reserve banking and maturity transformation to create money and credit, to non-bank financial intermediaries (NBFIs) like hedge funds and insurance companies that manage risk and diversify funding sources. While this global integration enhances economic efficiency and growth, it simultaneously introduces systemic vulnerabilities arising from leverage, liquidity mismatches, and the psychological dynamics of fear and greed, necessitating robust regulatory frameworks like Basel III and oversight bodies to mitigate the risks of contagion and financial crises.