The Architecture of the System

2.1 The Financial System at a Glance

The financial system can be viewed as a network of markets, intermediaries, and instruments. Its key components are :

  • Financial Markets (Money Markets, Bond Markets, Stock Markets, Derivatives Markets).

  • Financial Intermediaries (Banks, Insurance Companies, Pension Funds, Mutual Funds).

  • Regulators (Central Banks, Securities Regulators, Insurance Authorities).

2.2 Major Players in the Industry

The key institutions within the financial services sector include :

  • Commercial Banks: The most significant players in retail and corporate lending.

  • Investment Banks: Focused on securities underwriting, trading, and advisory services.

  • Universal Banks: Combining commercial and investment banking activities .

  • Asset Managers: Mutual funds (Vanguard), hedge funds, private equity firms.

  • Insurance Companies: Life and Property/Casualty insurers.

  • Finance Companies: Micro-lenders and consumer finance providers.

  • Fintech: Non-bank technology firms providing financial services.

2.3 Markets vs. Intermediaries

Financial services are delivered both through markets and through intermediaries . There is a critical distinction between:

  • Intermediation: A bank issues debt (deposits) to lend to a borrower.

  • Disintermediation: Companies can raise capital directly from investors by issuing equity or bonds (e.g., IPOs).

2.4 A Simplified Framework for Analysis

An effective framework for understanding financial services firms examines them from two sides :

  • “Inside”: Products/services, customers/markets, funding/capital, personnel/systems, management.

  • “Outside”: Volumes/margins, net interest income, asset quality, fee-based income, leverage/liquidity, capitalisation, profitability.

This framework will guide the analysis across all modules .

 
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