OVERVIEW ON FINANCIAL SYSTEM

What Is a Financial System?

A financial system consists of institutional units and markets that interact, typically in a complex manner, for the purpose of mobilizing funds for investment and providing facilities, including payment systems, for the financing of commercial activity. The role of financial institutions within the system is primarily to intermediate between those that provide funds and those that need funds, and typically involves transforming and managing risk. Particularly for a deposit taker, this risk arises from its role in maturity transformation, where liabilities are typically short term (for example, demand deposits), while its assets have a longer maturity and are often liquidity (for example, loans). Financial markets provide a forum within which financial claims can be traded under established rules of conduct and can facilitate the management and transformation of risk.

Within a financial system, the role of deposit takers is central. They often provide a convenient location for the placement and borrowing of funds and, as such, are a source of liquid assets and funds to the rest of the economy. They also provide payments services that are relied upon by all other entities for the conduct of their business. Thus, failures of deposit takers can have a significant impact on the activities of all other financial and nonfinancial entities and on the confidence in, and the functioning of, the financial system as a whole. This makes the analysis of the health and soundness of deposit takers central to any assessment of financial system stability.

WHAT IS FINANCIAL CORPORATIONS?

The term “bank” is widely used to denote those financial institutions whose principal activity is to take deposits and on-lend or otherwise invest these funds on their own account. In many countries, “banks” are defined under banking or similar regulatory legislation for supervisory purposes. In the Guide, banks and other deposit takers (other than central banks) are included within an institutional sector that is known as “deposit takers.” Deposit takers are defined as those units that engage in financial intermediation as a principal activity—that is, channel funds from lenders to borrowers by intermediating between them through their own account.

• have liabilities in the form of deposits payable on demand, transferable by check, or otherwise used for making payments; or

 • have liabilities in the form of instruments that may not be readily transferable, such as short-term certificates of deposit, but are close substitutes for deposits in mobilizing financial resources and are included in measures of money broadly defined.


Commercial banks, which typically take deposits and are central to the payment system, fall under the definition of deposit takers. These banks, which participate in a common clearing system, may be known as deposit money corporations. Other types of institutions that may be covered by the definition include institutions described as savings banks (including trustee savings banks, as well as savings and loan associations); development banks; credit unions or cooperatives; investment banks; mortgage banks and building societies (where their particular specialization distinguishes them from commercial banks); and micro-finance institutions that take deposits. Government-controlled banks (for example, post office savings banks and rural or housing banks) are also deposit takers if they are institutional units separate from the government and they meet the definition of a deposit taker outlined . This list is not exhaustive, and classification as a deposit taker depends on the function of the corporation, and not on its name. 


Within an economy, the definition of deposit takers should encompass a group of institutions that meet the definition of banks and similar institutions under banking or other legislation, because like the statistical definition for deposit takers, a common legal criterion for a bank is the taking of deposits. If some institutions are banks in a legal sense but not deposit takers as described above, in following the Guide they should still be classified as “deposit takers,” but in any associated description of the FSI data the status of these institutions should be explained, with some indication of their importance to the data disseminated.