Answer to Question #286680 in Finance for Andrick Angel

Question

Discuss what a financial system is and the key role that any financial system plays in an economy. What are the main reasons for regulating financial institutions and how do the regulators do this? 15marks

Answer 1

A financial system is a network of financial institutions such as banks, insurance companies and, stock exchange markets. It allows the exchange of funds among the participants, including lenders, borrowers, and investors.

The key role of any financial institution is to control the money supply. Primarily, they ensure liquidity in the economy—financial institutions channel surplus funds into entities that have deficits through borrowings and lending.

Some of the main purposes of regulating financial institutions include; protecting consumers of financial products and their investments and ensuring sound management of the institutions hence avoiding risky decisions. Also, regulations provide safety and stability for financial institutions.

Regulators use laws and rules that govern financial institutions, ensuring that all operations are controlled. They also ensure that reasonable and equal services are provided to consumers. Regulators also require financial institutions to take specific measures when transacting financial products. Additionally, they enforce specific policies that control specific moves made by these institutions. Furthermore, regulators govern the access funds in an economy hence regulating financial institutions.