Modern Financial System

Financial institutions not only are the leaders of financial markets and important participants, but also play a core role of modern financial system. The main functions of financial institutions that mean shareholder-owned private or government-owned public organizations are the connection between savers and borrowers of funds. There are various financial institutions in the world, such as Financial Service Authority, banks, insurance companies, finance companies and so on. From the quite serious financial crisis in the last two years, it is easily seen that the influences of banks are very obvious. According to distinct classifications of different countries, there are various kinds of banks, but three types of banks often can be seen, central banks, commercial banks and investment banks. This essay will mainly analyse the functions of three types of banks, simply introduce the drawbacks of banks which relate to consumers and show how to improve the performance of banks for the benefits of consumers.

It is common known that there are diverse functions among central banks, commercial banks and investment banks, which are the three main banks of the whole banking system.

According to Encyclopedia, -"a central bank, reserve bank, or monetary authority is the entity responsible for the monetary policy of a country of a group of member states."? Central Bank's main responsibility is to maintain country"„¢s monetary stability and supply, but there are more common functions involved, controlling of the subsidized-loan interest rates and assuming the last depending object when the financial crisis occurs in order to stabilize financial markets. Specifically, a central bank has five functions, not all of which can be carried out by all this type of bank. Firstly, actualizing monetary policy is the most basic function. Whether it is a fiat currency, gold-backed currency, currency board or a currency union, the fundamental job of a central bank is to build up own national currency. Secondly, determining interest rates is another responsibility. A central bank controls some short-term rate in order to affect stock market, bond market, real estate and other relative market. For instance, at the meeting of European Central Bank"„¢s Governing Council, the interest rate is released. The third one is to act as the government"„¢s bank and banks"„¢ bank. When government needs urgent help or other banks require assistance, the central bank can give contribution to the crisis. Fourthly, a central bank needs to control the nation"„¢s entire money supply. If there is chaos of money supply, the whole social economy will collapse. The last one is regulating and supervising the banking industry. To be specific, a central bank can adjust margin loans, which will indirectly affect the benefits of consumers. Though there are plenty of functions, a central bank still has limited power to put theory into practice, opposite to the opinion of common people, because interest rates and currency rates cannot be both controlled in an open economy according to the famous formulation"? impossible trinity"? belonging to Robert Mundell.

Besides a central bank, investment banks also make a contribution to the economy. The core function of an investment bank is to achieve the separation between the ownership and rights to use capital funds with the lowest cost as the combined intermediary between capital suppliers and demanders, an investment bank. In general, it can be divided into three parts. To begin with, via helping capital demanders to release securities ownership and bond certificate, investment banks sell them to capital suppliers and connect the demanders and the suppliers. In this process, investment banks act as important intermediaries. Moreover, another function is to achieve effective allocation of funds. For example, they carry out financing for governments, national key projects and large-scale enterprises. Last one is that investment banks play a significant role of construction of the market. Investment Bank is to the main core of facilitating transactions in the securities market.

The most important type of bank contributing to economy of current society is commercial banks, which directly focus on consumers. According to Howard, D.C and George, H.H (1973), there are a lot of main functions of commercial banks. Firstly, credit creation is the clearest function that can differentiate other financial institutions. Specifically, commercial banks can provide loans and investments for production, sales, investment, consumptions and government"„¢s needs, all of which need credit. Credit lets us use future"„¢s money or use them to make more revenue. Secondly, a commercial bank has depository function. Besides safety and convenience, using the payment facilities of the system is also the major part. The third one is payments and collections. Nowadays, there are various payment methods, such as checks, notes, drafts, money transfers and others. Moreover, automated clearing houses have been established, where can directly deposit the security payments and wages in bank accounts of employees. Fourthly, other financial institutions also have this function, saving accumulation and investment. Savings can be delivered into productive uses by commercial banks. Fifthly, trust service is an added feature, which can make huge profits. Other services are the last function, according to business studies, which include advances, cash credit, overdraft.

According to the functions of different banks, only commercial banks are directly related to the benefits of consumers. However, there are still a lot of drawbacks in the commercial banking system, two of which are quite apparent. For one thing, making too profit from customers is the obvious defect. For example, according to the rules of UK Lloyds banks, if someone overdraws, banks will pay for debts, but consumers will give banks 15 ponds and 6 ponds every day until consumers pay the debts. Studies has shown that in 2009, U.S. banks have charged 38.5 billion dollars which is twice as much as that reported in 2000 because of serious overdraft of consumers. For another one, commercial banks sometimes give misleading to consumers in order to make profits. In fact, nowadays, commercial banks often encourage the poor to use of credit cards, which can be understood as toxic loan. Whether in Asia or in Europe, some misleading suggestions such as recommending buying stock or bond can be often seen, which is primary to their own profits.

Based on the above analysis, the way of the improvement for the benefit of consumers should also be various. According to Thompson, B.D (1978), there are eight points that can be carried on in customer markets. First, relationship banking should be focused on. Making the whole financial relationships between retail and commercial customers, for instance, is a good way. Second, fee income should also be considered, which directly relates to consumers.

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