AN OVERVIEW OF GLOBAL FINANCIAL SYSTEM

Prior to fathoming the general overview of global financial system, one must have a better grasp of what financial system is. By definition, a financial system is a set of institutions such as banks, insurance companies, and stock exchanges that permit the exchange of funds. As it exists on a firm, regional, and global level, the financial system also includes sets of rules and practices that borrowers and lenders use to decide which projects get financed, who finances projects, and the terms of financial deals.

When we look at from the international perspectives, the global financial system is the worldwide framework of legal agreements, institutions, both formal and informal economic action that together facilitates international flows of capital for the purposes of investment and trade financing. Hence, the borrowers, lenders, and investors exchange current funds to finance projects, either for consumption or productive investments, and to pursue a return on their financial assets.

Broadly speaking, the global financial system has changed significantly following the financial crisis that took place somewhere between 2007 and 2008. Such developing countries have seen a decline in their net financial flows due to the collapse of the international banking sector, which was further exacerbated by weak growth prospects in key emerging markets and low commodity prices from 2014 until 2015.

While countries in East and South Asia continue to be major recipients of global financial flows, they have also become major providers for other developing countries in particular. Thus, public financial flows which derive from the assistance of overseas development and multilateral lending have further exhibited strong growth following the above financial crisis; mitigating the decline in private flows.

Moreover, the global financial system involves a multitude of players from small individual investors to colossal corporations and governing bodies where each has a role to play. The systemic importance of the global financial system stems largely from its multiple roles through:

1. Regulating and Facilitating Transactions: The system helps to regulate and facilitate the exchange of money and assets globally.

2. Allocation of Resources: The system helps in the allocation of resources by channeling funds from those who have surplus capital (savers) to those who are in need of capital (borrowers).

3. Risk Management: The system allows for the management and diversification of risks which are associated with cross-border financial activities.

Aside from the aforementioned roles, questioning how the global financial system works are practically anchored in exchanges between buyers and sellers within markets, underpinned by financial institutions, and regulated by international laws. It is a system of endless cycles of lending and borrowing, buying and selling, and risk management.

When it comes to the operation of global financial markets, it is literally founded on the principles of supply and demand. The amount of capital/equity in the form of money or assets, for example, flows from places where it is abundant to places where it is scarce. As a result, this flow is facilitated by financial markets which include:

- Stock Market: it is where the shares of publicly-held companies are issued and traded.

- Foreign Exchange Markets (Forex): it is where currencies are traded (e.g. US Dollar, UK Pound, Japanese Yen, and so on).

- Commodity Markets: it is where goods such as gold, oil, and wheat are traded.

- Bond Markets: it is where debt securities are traded.

Above all, each financial market operates under a system called "price determination" – a concept by which the price of an asset is set based on the amount of supply (sellers) and the level of demand (buyers) factors.