The document provides an overview of the key components of the modern financial system: financial assets (stocks, bonds, currencies, derivatives), financial markets (where assets are traded), financial institutions (banks, non-bank intermediaries, investment banks, securities firms), and regulatory agencies. It describes the main categories of financial assets and notes that households primarily access the financial system directly or through financial markets, while firms and governments do so mainly through financial intermediaries.

1. Financial
system
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2. Goal
A few slides to sketch a description of the
institutional configuration of the financial
system today

3. Four items
 Financial assets (or securities, or “bonds”
in the broadest sense of the term)
 Financial markets
 Financial institutions
 Central bank and other regulatory
agencies

4. Financial assets
 An asset is a good that lasts
 A financial asset is a legal claim of ownership, i.e.
a legal claim over the future benefits (net of costs)
of holding a lasting good
 The benefits of holding a lasting good result from:
 Using it or consuming it,
 Loaning it, renting it, or leasing it, and/or
 Trading it (selling it or bartering it) or transferring its
ownership in any other way (giving it away as a
present).
 In a market monetary economy, these benefits
can be regarded as cash (or monetary) flows

5. Categories of financial assets
 Money
 Stocks or equities: securities that represent partial
legal ownership of a corporation
 Bonds: A security issued by a corporation or
government promising to repay a certain amount
of money
 Foreign-exchange securities: Foreign currencies
(monetary denominations) or derivatives on
foreign currencies
 Derivatives: contingent securities whose value
depends on the value of other securities, e.g.
forwards, futures, options (calls, puts), and swaps.

6. Financial system
“Direct” finance or
through access to
financial markets
Mainly households Mainly firms and governments
Indirect finance or
through financial
intermediaries
Source: Glenn Hubbard, Money, Banking, and the Financial System, 3rd edition.

7. Financial markets
 Physical or virtual places where people trade
financial assets
 Physical exchanges where people meet face to
face to trade (e.g. NYSE, London Stock
Exchange, etc.)
 Over-The-Counter (OTC, e.g. NASDAQ) or virtual or
electronic trading (ECNs, e.g. Instinet, Arca)
 Primary markets: Financial markets where newly-
issued financial assets are sold for the first time
 Secondary markets: Financial markets where
people trade existing (or outstanding) securities.

8. Financial institutions
 Financial intermediaries: firms that borrow funds from
savers and loans them to borrowers
 Commercial banks: Financial intermediaries that take
deposits from households, firms, and governments and
use them to make loans or buy securities
 Nonbank financial intermediaries: S&Ls, savings
banks, credit unions, insurance companies, pension
funds, mutual funds, hedge funds, finance
companies, GSEs
 Investment banks: Non-depository institutions that
focus on advising clients, and underwriting their
securities, and – until before the Dodd-Frank act –
proprietary trading
 Other securities firms: Brokers, dealers, underwriters

9. U.S. household wealth

10. Regulation of financial system
Source: Frederic S. Mishkin, Economics of Money, Banking, and Financial Markets 3rd edition.