What is Financial System?

The financial system is a set of institutional arrangements through which financial surpluses in the economy are mobilized from surplus units and transferred to deficit spenders. The institutional arrangements include all conditions and mechanisms governing the production, distribution, exchange and holding of financial assets or instruments of all kinds and the organizations as well as the manner of operations of financial markets and institutions of all descriptions. Thus, there are three main constituents of financial system - financial assets, financial markets and financial institutions.

Financial assets are subdivided under the two heads of primary (or direct) securities and secondary (or indirect) securities.

The secondary securities are financial claims issued by financial institutions or intermediaries against themselves to raise funds from public, e.g. bank deposits, life insurance policies, UTI.