This lesson establishes the foundational role of the financial system in the economy and its structural components. The global financial system is the framework within which financial institutions, markets, and instruments operate to facilitate the flow of funds from savers to borrowers . The financial system consists of financial institutions, markets, and instruments that together enable financial intermediation and support economic growth .

1.1 The Economic Function of the Financial System
The primary function of the financial system is financial intermediation—channelling funds from economic agents with surplus funds (savers) to those with a deficit (borrowers) . This process supports consumption and investment spending by making funds available to those who need them for productive use . The financial system also provides a payment mechanism for the exchange of goods and services, facilitates risk management through diversification, and supplies price information for decision-making . Financial markets are essential for price discovery and capital formation . The modern financial system distinguishes between the functional and empirical approaches to defining money, reflecting the complexity of financial flows in a modern economy .

1.2 The Classification of Financial Markets
Financial markets can be classified in several ways. By Maturity: Money markets deal in short-term debt instruments (maturity less than one year), while capital markets handle long-term debt and equity securities . By Trading: Primary markets are where new securities are issued; secondary markets are where existing securities are traded . By Structure: Anglo-Saxon financial systems (e.g., the US, UK) are characterised by a greater reliance on capital market financing, while continental European systems rely more heavily on bank-based intermediation . The distinction between these models is a fundamental concept in understanding how different financial systems operate and are regulated .

1.3 Key Sectors and Intermediaries
The financial services industry comprises four key pillars: commercial/retail banking, investment banking, asset management, and insurance [citation:1,3]. Banks are deposit-taking institutions that perform financial intermediation by transforming liquid liabilities (deposits) into illiquid assets (loans) . Investment institutions include asset managers, mutual funds, pension funds, and hedge funds . The role of central banks is distinct—they oversee monetary policy and financial stability rather than competing with private financial institutions .