Role of the Us Financial System

Role of the US Financial System

As a company starts to expand and grow, a need to raise both short-term and long-term capital exists. This becomes one of the most basic business activities. Components of the US Financial System are the US Financial markets, investment bankers and capital sources, both short-term and long-term. Some major players in financial markets are brokers, dealers, financial intermediaries and investment bankers. Trahant (2007) stated that the US financial system is facing a crisis that rivals a natural disaster. He stated that “what we need is a miracle of balance: Enough financial penalties for those who gave or accepted risky loans – and at the same time enough assistance to rescue the global credit system (Trahant, 2007, p. 2).”

Financial Markets

Financial markets are those markets that facilitate all types of financial transactions. Two types of financial markets exist: money markets and capital markets. The main differentiation between money markets and capital markets is the length of maturity of the securities. Money market instruments are forms of debt that mature in a year or less. Capital market instruments are comprised of debt and equity securities. Equity instruments normally do not carry a maturity date, although they do cease to exist if the company is dissolved. Capital debt carries a maturity date of more than one year. Oftentimes they carry a maturity date of 30 years or more (Higgins, 2007, pp. 31-32). Three types of capital markets exist: primary markets, secondary markets and private markets. Primary markets offer debt and equity to investors. Secondary markets are where existing debt and equity issues are traded by individual and institutional investors. In a private market, securities are offered and sold to a limited number of investors (Higgins, 2007, pp. 32-33).

Investment Banks/Bankers

Investment bankers offer several services to a company. Investment banks are financial intermediaries that merchandise...