We live in financial globalization era, where financial markets, institutions and economies become more tightly interlinked and are more forward to full integration than ever. Unfortunately, the 2007-2008 global financial crisis has demonstrated that financial globalization can lead to catastrophic outbreaks. The purpose of this essay is to briefly explain role of financial system, give examples of financial instruments, and discuss causes of financials crisis; what effects did it had on US and UK economies and what measures should be taken to avoid similar events in future. Finally, in this essay I will look more deeply into impacts of financials crisis on insurance and pension fund companies. .
Financial system is a compilation of financial institutions, markets and services that facilitates the transfer and allocation of funds effectively and efficiently (Leote, n.d.). It is one of the most significant creations of modern society that plays a vital role in growth and development of countries economy. There are many functions that financial system performs, which are directly and indirectly related to resource allocation. According to Sinkey (1998) main functions of financial system are: .
1. Clearance and settlement of payments;.
2. Aggregation and disaggregation of wealth and flows of funds in order to bring small and large investors with savers.
3. Movement of resources over time, space and industries .
4. Accumulation and processing of information for decision making purpose.
5. Providing ways for managing uncertainty and controlling risk .
6. Providing ways for dealing with incentive and asymmetric information problems that arise in financial contracting.
Probably the main components of financial system are financial instruments as they are crucial for processing some of these functions. Financial instrument is nothing but legal agreement that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity (Lopes and Rodrigues, 2008).