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A financial system consists of institutional units and markets that interact, typically in a complex manner, for the purpose of mobilizing funds for investment, and providing facilities, including payment systems, for the financing of commercial activity.

The role of financial institutions within the system is primarily to intermediate between those that provide funds and those that need funds, and typically involves transforming and managing risk. Particularly for a deposit-taker, this risk arises from its role in maturity transformation, where liabilities are typically short term, (e.g., demand deposits), while its assets have a longer maturity and are often illiquid (e.g., loans).

Financial markets provide a forum within which financial claims can be traded under established rules of conduct, and can facilitate the management and transformation of risk. They also play an important role in identifying market prices (“price discovery”).

Source Publication:
IMF, 2004, Compilation Guide on Financial Soundness Indicators, IMF, Washington DC, para. 2.2.

Statistical Theme: Financial statistics

Created on Thursday, August 26, 2004

Last updated on Wednesday, November 30, 2005