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Complexities of the U. s financial system - Assignment Example

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Complexities of the U. S financial system Name: Institution: Complexities of the U. S financial system The US financial system is extremely complex and is affected by a number of environmental factors, which include the economy and federal regulations. The complexities inherent in the US financial system also impact different aspects of the economy, as well as the existence of businesses and individuals in the country (Pryor, 1996)…
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Complexities of the U. s financial system
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Complexities of the U. s financial system

Efficiently operating financial markets play a part in the health of the economy (Fabozzi, Modigliani & Ferri, 1994). Economic growth is underpinned by financial market development. Financial markets guide the flow of individual and business savings and investments, within the economy to improve the buildup of capital and enhance effective production of products and services. The price of returns on investments and credit plays a part in signaling financial market participants such as consumers and producers to channel funds, particularly from businesses and households to investors, governments, consumers and businesses. Financial markets link those who need the funds with willing lenders (Demirguc-Kunt & Ross, 2001). Strong financial markets and institutions and a wide array of financial instruments and products, meets the needs of both lenders and borrowers, therefore, the entire economy. Moreover, strong financial markets enhance the flow of funds among countries, thereby enhancing the economies. Additionally, financial markets also reduce transaction and search costs within the economy. Through the provision of a wide array of financial products with differing pricing and risk structures and maturities, financial systems provide products to participants, which offer borrowers and lenders with close matches for their needs. Persons, businesses, as well as governments that need funds can effortlessly discover which financial markets or institutions offer funding and the costs imposed on the borrower (Pryor, 1996). This enables investors to compare financing costs to their anticipated returns on investment hence making the most effective investment choices suited to their needs. Therefore, financial markets influence the allocation of credit within the economy, facilitating production of products and services. The key rationale for creating the Federal Reserve was to deal with banking panics. Other roles are provided in the Federal Reserve Act. The Federal Reserve furnishes an elastic currency, allowing for the rediscounting of commercial paper and establishes an effective supervision system of banking in the US. The Chairman of the Federal Reserve serves as the head of the country’s central banking system and is the executive officer of the Federal Reserve’s Board of Governors (Demirguc-Kunt & Ross, 2001). Conversely, the Federal Reserve Board, conducts the country’s monetary policy, supervises and standardizes banking institutions and protects consumers’ credit rights. The Board also ensures the financial system’s stability and offers financial services to the government, official foreign institutions and the public. Today, the Federal Reserve serves as the country’s central bank, striking a balance between the government’s role as a centralized institution and banks’ private interests. It also monitors and regulates banking institutions and protects consumers’ rights. Through a monetary policy, the Federal Reserve manages the country’s money supply in order to attain stable prices by deterring deflation and inflation, maximum employment and minimal long-term interest rates. Moreover, the Federal Reserve maintains the US financial system’s stability and acts as a banker and lender of last resort to commercial banks and the US government (Pryor, 1996). The reserve ... Read More
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