Savings and the Financial System

Savings and the Financial System

Financial System

  • A network of savers, investors, financial institutions, and financial assets that work together to transfer savings from savers to investors.
  • It is a necessary component for a growing economy.
  • Examples of investments:
    • Individuals investing in their homes.
    • Businesses investing in tools, equipment, or machinery.
    • Government investing in highways, hospitals, universities, and other public goods.

Financial System – Four Parts

  • Savings
    • Savers provide savings that borrowers will use.
    • Examples include weekly checks, contributions to retirement funds, and investing surplus cash.
  • Financial Intermediaries
    • Collect funds that savers provide so that they can be loaned to borrowers.
    • These include institutions like banks, credit unions, life insurance companies, pension funds, and finance companies.
  • Borrowers
    • Borrowers use these funds for various purposes
    • A business might invest in capital goods for growth, an individual might buy a house/car, etc.
  • Financial Assets
    • Document to prove borrowing has taken place and there is a claim on income and assets from the borrower.

Financial Intermediaries

  • Banks
    • There are fewer than 6,000 banks in the country, but many have branch locations.
    • While they offer checking/savings/CD accounts, their most profitable products are credit cards.
    • Revenue streams include credit card fees, overdrafts, and late fees.
  • Credit Union
    • Nonprofit service cooperative that is operated for the benefit of ONLY their members (municipal workers, teachers, employees at large companies) with around 7,200 credit unions
    • Accept deposits, make loans, issue CDs, and offer checking accounts
  • Finance company
    • Firm that specializes in making loans directly to consumers.
    • Also buy installment contracts from merchants who sell goods on credit.
    • Merchants usually can’t wait for the installment contract to finish and so sell to finance companies who take on the risk.
  • Life insurance companies
    • Provide financial protection for a spouse, children, or other dependents in events of a person’s death.
    • People pay a premium, periodic fee, that the insured pays for this policy.
    • Because this fee is collected periodically, they have surplus cash to lend to large businesses.