FINANCIAL SYSTEM
The word “System” can be described, generally as a method or way of doing something. It can also be used to refer to a “group of related parts working together”.

The financial system therefore can be defined as “a conglomerate of various institutions, markets, instruments, and operators that interact within an economy to provide financial services. Such services may include resource mobilization and allocation, financial intermediation and facilitation of foreign exchange transactions to enhance international trade. Among all these services, the one that is central to all financial institutions is the role of financial intermediation. Thus, in clear terms, the U.S financial system comprises the institutions and persons which comprises the banking institutions, the non-banking institutions, the regulatory bodies, and other financial market participants, that interact to play the role of financial intermediation in the U.S economy.

FINANCIAL INTERMEDIATION
Money plays very important role in an economy. Among other functions, it serves as a medium of exchange. However, there is a basic problem about money. There are some individuals and firms in the economy who have excess money that they do not want to consume now. They have enough to settle their immediate needs but have some left over (surplus money) they would want to save for future spending. This group is called net savers or the surplus unit of the economy. However, just as at the same time there are other individuals and firms that do not have enough money to meet their current spending. There are businesses that have good ideas and business opportunities they would want to invest money in, but do not have the money. They will be willing to borrow from the net savers who have idle funds. For this reason, these second group are called net borrowers or the deficit unit of the economy

The net borrowers want to borrow from the net savers. However, there are three barriers that make it difficult for the borrowing to take place. First, the borrowers do not know those who have excess funds. Again, even if they know them, those who have excess funds may not trust the investors (borrowers) to the extent of being willing to lend to them. Thirdly the amount required by the investor may be too much for one saver or few savers to provide.

To remove the barrier, there is, therefore, a need for an intermediary (a go-between) who will play the role of bridging the gap between net savers and net borrowers. This role is called financial intermediation. Financial intermediation is the role of channeling money from net savers who have idle funds to investors or borrowers who have need for these funds. Any person or institution that plays the role of financial intermediation is called a financial intermediary, or a financial institution. These financial intermediaries include banks, and other non- bank financial institutions such as insurance companies, finance houses, trust funds, among others.

How is this role of financial intermediation performed? The financial intermediaries provide an avenue for net savers to keep their idle funds with them. They pay some interests to those savers to encourage them to save more. The savers trust the financial intermediaries and as such keep their money with these intermediaries who promise to pay the savers back when they need the money. These intermediaries having collected the idle fund have performed a function called saving mobilization. Having mobilized the idle funds, the intermediaries go ahead to lend the money out to the net borrowers who need the money for investment. The ultimate owners of these funds (net savers) may not know that the money has been given out on loan. The intermediaries have learned from experience to keep only a little fraction of their total deposits to pay back the few savers who will come for their money.

The role of financial intermediation is so crucial in every economy. It affects the rate of investment, the Gross National Product, the level employment, level of income and also further savings. As a result of the crucial position of financial intermediaries, the monetary policies of the government are usually implemented by them. An understanding of the role of the various institutions is, therefore, important for a better understanding of how monetary policy works in U.S.

Functions of Financial Intermediaries
The functions of financial intermediaries can be summarized as follows:
a) Mobilization of savings (capital formation)
b) Granting of loans and advances
c) Payments mechanism
d) Security trading
e) Transmutation
f) Risk diversification
g) Portfolio management

Mobilization of savings (capital formation)
Financial intermediaries operate a network of branches and through these; they mobilize savings from all sectors of the economy. As a result, a pool of resources is made available for the use of the customers for productive purposes. This operation ensure that the larger, the savings mobilized the larger the investment and the higher will be economic growth and development
Granting of loans and advances
The savings so mobilized are given out as loans and advances to both private and public sectors of the economy. These take the form of short, medium and long-term loans for productivity uses. A part of the savings is invested in government securities, bonds etc. and in the process they provide funds to the government for their day to day activities. As these funds are provided to businesses, their operations expand; employment is generated, effective demand increases, profit rise which will increase savings, investment rises and economic development results.

Payment mechanism
Financial intermediaries facilitate payments by enabling consumer, business and governments to complete transactions without cash. Cheques and in some economy, credit cards are used to transact business. Cheques are efficient, safe and preferred by some recipients in transactions.

Security Trading
Financial intermediaries issue securities with the terms suitable to consumers, on the one hand and by securities desired by businesses on the other hand. In deed, these intermediaries are brokerage house, securities dealers, the stock exchange, trade equities, and corporate bonds, Federal government debt issues, etc. Their activities in primary securities trading reduce transactions to a routine, and costs of trading minimized by the national scope of the market.

Transmutation
Transmutation is the process of changing the package of terms of money flowing from saver to investor. Financial intermediaries, by purchasing primary securities and issuing secondary securities add choices to borrowers and lenders. Such secondary securities issued reflect the tender’s preference hence the lender is willing to provide his funds at a lower interest rate. For example, time deposits at commercial banks are preferred by small saver over corporate bonds because the saver can withdraw his or her money at any time without loss of principal and without cost. In most cases, timing and amount are changed through transmutation with alternations limited only by the creativity of the financial institution and the acceptance of its customers.

Risk Diversification
Diversification involves the spreading of investment in order to reduce risk. Financial intermediaries are able to buy a large number of investments and reduce the negative effect of one investment returning a much lower than the expected rate. That is, the potential negative effect of one asset in a small portfolio, which many investors have, is mitigated by the holdings of hundreds of assts. Unlike individuals, financial institutions provide services and transaction at a relatively low cost hence large economies of scale result. Though some investments do not produce the expected return, others return more profit than expected, hence the average return will approximate the expected return more closely if many securities are owned than if only a few securities are held.
Portfolio Management
Financial institutions act as portfolio mangers and advisers over primary securities home mortgages, commercial mortgages, consumer loans, state government s securities, and business loans. They provide a convenient place where savers can safely invest excess money and customers can easily borrow funds. In addition, investments are protected against unscrupulous borrowers by the institutions, qualified loan officers and a body of collectors and attorneys. Moreover, well trained investment analysts and loan officers seek good investment opportunities and screen prospective securities so as to obtain the best result in convenience, protection against fraud, quality of investment selection, and low transaction cost.

In summary financial intermediaries are important in any economy desiring to develop. There is uneven spread of financial resources in almost all economies. Part of the function of the financial intermediaries is to make idle fund in surplus sector or area available to a deficit area. By linking up investors with savers, economic growth and development is accelerated. Through tapping of savings potential of individuals unwilling to invest, the aggregate financial resources in the economy are increased. Thus the financial intermediaries act as intermediaries between borrowers and lenders. These financial intermediaries are responsible for challelling of funds from ultimate lender to borrowers in an efficient manner because of their expertise. Thus they provide capital for enterprises which hitherto could have been fund starved. Through the activities of financial intermediaries in the financial market, saving in the form of loanable funds is encouraged and thus the transaction demand for money is reduced while the speculative demand for money is increased.