The Financial System: Structure, Intermediaries, and Markets
The Financial System
The financial system’s structure is composed of a series of intermediaries regulated by government agencies. Savings are channeled towards financing private consumption (families), business investment, and public spending.
Financial Assets
Financial assets (or financial instruments) are securities that represent a product or wealth for those who own them (an asset) and an obligation (a liability) for those who owe them.
Key Characteristics of Financial Assets
- Liquidity: Measures the ease and certainty of converting an asset into cash without significant losses.
- Risk: Represents the probability that the debtor (issuer) does not fulfill the agreement (does not pay).
- Profitability: Defined as the asset’s ability to produce interest.
Financial Intermediaries
Brokers
Brokers are specialized institutions that mediate between savers and investors.
Banking Intermediaries
- Banks and Savings Banks: Offer financial products accepted as a means of payment.
Non-Banking Intermediaries
- Non-banking companies such as insurance or leasing companies are different from banks because they cannot offer financial products used as money or a valid means of exchange.
Spanish Banking Financial Intermediaries
In Spain, banking financial intermediaries include the Bank of Spain, private banks, savings banks, and credit unions.
Bank of Spain
As part of the European System of Central Banks (ESCB) and the Eurosystem, the Bank of Spain works alongside the European Central Bank (ECB) and other EU central banks.
Private Banks
Commercial banks raise funds to develop their activities by receiving deposits from the public and issuing fixed and variable income securities.
Savings Banks
Although savings banks specialize in raising funds for small savers, they practically operate as private banks.
Credit Unions
Credit unions are associations of individuals or companies with common interests and needs, developing a specific business.
Non-Banking Financial Intermediaries
Official Credit Institute (ICO)
The ICO is a financial intermediary that does not capture public resources in the same way as banks.
Insurance Companies
Insurance companies issue a specific financial asset: the insurance policy.
Private Pension Funds
These funds complement the post-retirement pension paid by Social Security.
Investment Companies and Funds
These groups pool investments to gain better access to the stock market.
Leasing Companies
Leasing companies offer a financing system where a company can acquire capital goods through rental for a periodic fee.
Factoring Companies
Factoring is another way of financing businesses by selling all rights to receivables represented on invoices or bills of exchange.
Money Market Intermediaries
These companies manage highly liquid assets in specialized markets.
Mutual Guarantee Societies
Mutual guarantee societies facilitate access to financing for partners, usually small or medium-sized enterprises.
Stock Market
Given its importance, the stock market is a significant non-bank financial intermediary.
The Stock Market
Stock markets are public service institutions that facilitate the negotiation of any security in a competitive, orderly, and transparent manner.
Fixed Income
This class of securities represents a percentage of the loan granted to a specific entity or public administration.
Equities
The most popular equities are stocks, which represent a percentage of ownership in a company.
Stock Market Index
A stock market index is an indicator of market behavior based on the performance of representative securities, chosen according to their liquidity.
The Equity Market
Companies attract financing by issuing securities called stocks in exchange for money and the transfer of a percentage of ownership.
Primary Market (Issuance)
The primary market is where assets are created, and savings are channeled to investment.
Secondary Market (Trading)
The secondary market is where previously issued securities are traded, allowing investors to buy and sell shares without affecting the activity of the companies.
Continuous Market
The continuous market is a computerized interconnection between the four Spanish stock exchanges that allows trading of certain securities through computer terminals in real time.
Financing Companies
Internal Financing
Own Funds
These resources are more stable for a company because they do not need to be repaid and are not subject to interest payments.
Contributions from Owners (or Shareholders)
These are funds obtained by selling shares in a company in specialized markets like the stock market.
Reserves
Issuing shares to attract resources is only available to large businesses.
External Financing
Companies often need more resources than those provided by internal financing.
Trade Credit
This is the automatic financing that a company obtains when buying from suppliers on credit.
Loans
Companies borrow from bank financial intermediaries (banks, savings banks, credit unions, etc.).
Borrowings
When companies need a lot of money and the loan conditions offered by banks are not acceptable, they can borrow by issuing debt securities, also known as bonds.
Spontaneous Funds
These are resources that are not specifically sought by the company but are available for its intended purpose.