Financial Systems And The Difference Between Banking And Finances
Finance is a wide-ranging term encompassing a range of things about the study, generation, and distribution of financial resources. There are three main departments in most modern economies that perform different functions in support of the financing of the economy: money, banking, and government. Money usually refers to coins, currency, bills, bank deposits, and other such financial instruments. Banking and money involve managing money as it flows through the economy; banks do this through lending, creating loans, and tracking and recording it. The third category, government, refers to central bodies like the Federal Reserve or other government organizations that undertake the role of financing the economy with public funds.
When it comes to money management, there are four main aspects to consider. The first is credit risk, which is related to the possibility that borrowers will not repay the bank’s loans. Interest rates are also considered in this regard. The second area of finance is investment strategy, which means the use of existing resources (in the case of banking) or the construction of new assets (in the case of government). The third aspect is consumption, which refers to the raising and spending of money as it is needed. The fourth and final area of finance is portfolio management, which means assigning probabilities to various economic variables and their impact on the overall performance of the portfolio.
Banks make the majority of their revenue from the lending and application of credit. Money markets, which are mutual funds that trade bonds, stocks, and options on financial instruments, are another source of revenue for banks. As you can see, the primary function of banks is to lend money. In addition, they participate in fiscal policy by making both direct and indirect purchases of financial assets to serve as a backstop for various government programs. These activities are often considered to be part of financial services, which further distinguish them from other business sectors.
Financial services, on the other hand, involves the execution of complex financial systems. Banks alone cannot create economic policies, and money management is the essential ingredient in any good banking system. To illustrate, when a person wants to buy a house, he does not go directly to a bank. Instead, he goes to a mortgage company, a title company, a financial planner, a real estate agent, etc., depending on his needs and preferences.
Financial systems differ in scale and complexity depending on the scale of activities performed. Larger financial systems are generally more integrated than the smaller ones, requiring several intermediary institutions to ensure smooth passage of credits among parties. Smaller financial systems are more localized, composed of a few large establishments acting as intermediaries between other financial entities and customers. This setup enables them to respond quickly to changes in financing conditions.
The basic difference between finance and banking is the level of risk associated with each. In finance, the potential for losses is assumed by the market; in banking, the risk to the depositors and other creditors is assumed by the banking system. The final result is that the former protects funds from risk of loss and the latter facilitates financial developments for the benefit of the community.