The Role of the Financial Institutions in the Economy

                Financial Markets and Institutions Report By Institution                   Financial Markets and Institutions Report The Role of the Financial Institutions in the Economy Financial institutions play an imperative role in world economics today. It is through these institutions that parties are now able to create and provide ownership for financial claims. Kohn (2011) asserts that these structures have taken up the mantle of managing the risks of price change in today's market, immensely helping in retaining businesses that would have otherwise not survived the wild fluctuating prices. In addition, they have enabled growth and expansion of existing businesses together with the sprouting of new projects through financial empowerment. From a macroeconomic point of view, the service spurs economic growth in a country. Financial institutions’ role in transforming risks characteristics of assets is the backbone of modern economics. Financial Institutions are able to achieve this in two ways; first is by enhancing risk diversification and second by resolving the information asymmetry problem that otherwise may inhibit the smooth exchange of services and goods, and consequently creation of capital. Financial institutions provide liquidity in the economy. This functionality provided by the financial institutions is one of the integral means of stabilising a country’s economy. The relationship between economic performance and liquidity arises because many high return investment projects need long-term capital commitments. However, risk-averse lenders are very often unwilling to delegate control of their savings to investors for long periods. Financial institutions can do this by mobilising savings by creating small denomination instruments and pooling funds from desperate sources. These instruments give individuals a chance to hold diversified portfolios. Without pooling households and firm would have been very unstable due to the selling and buying of assets to offset the deficits in the books of accounts. The Role of the Financial Markets in the Economy A financial market is a place where sellers and buyers trade in financial assets like derivatives, stock, currencies, commodities, and bonds. They are of many types some of them including the money market and the capital market. Some of the roles the financial market plays in the economy include: Supporting institutional investors with their investments. Pension funds, for example, gauge their long-term commitments and calculate the retirement benefits they will have to pay in 10, 30 or 40 years through statistical means, for instance, projected changes in population. Once this is established they invest their assets by specific requirements, for instance, to guarantee the purchasing power of their participants once they have retired by indexing the income from their portfolio to inflation (Kohn 2011). Financial markets act as the i...