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Financial Institutions: An Introduction
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A full description of the financial system is provided in: http://bookboon.com/en/financial-system- an-introduction-ebook. Here we provide a synopsis. We present Figure 1 as a backdrop to this brief discussion. Perusal of the figure will reveal:
Ultimate borrowers issue financial securities, meaning that they borrow funds and issue evidences thereof (aka IOUs, instruments, obligations, etc.). There are only two: Debt and shares / equities. (A share actually represents part-ownership of a company, but for the sake of simplicity we regard it as a perpetual loan.) The ultimate lenders lend their excess funds, meaning that they purchase securities (evidences of debt and shares). The ultimate lenders and borrowers are comprised of the same four sectors of the economy, as indicated. Some of them are lenders and borrowers at the same time (for example, government), but generally they are one or the other.