A central function of the financial system is to facilitate an efficient allocation of resources in the economy... Discuss.

The financial system is devised of many markets, banks and businesses, all in the market for borrowing, lending and to supply services, in order to maximise there own, and clients utility from financial transactions.

Primarily, the financial system is made up of five sectors that all interact; households (personal), firms (commercial), public (government), financial (banks) and overseas. When all five interact with the assistance of intermediaries, brokers, dealers and regulators, the central part of the financial system is made.

In order for an effective financial system to exist, three main features must exist; firstly, monetary systems are vital in order to provide an efficient medium for exchange goods and services, secondly, efficient and complete financial markets which provide the transfer of financial assets, and finally, the ability to facilitate capital formation, whereby excess capital provided by savers can be made available to borrowers (investors).

A crucial aspe...