Financial Systems and InstitutionsStud Name: Stud ID: 270184LCUSN: 0711866864223Financial Systems and Institutions Stud Name: Liang CHEN Stud ID: 270184LC USN: 07118668642231Introduction:Financial intermediaries, financial innovation and financial regulatory are all important components in financial markets. Financial intermediaries take charge of transferring information between all the participants including all the news about financial innovation. But all the action are supervised by financial regulatory. This paper discusses these three parts and their roles in financial markets and their influence and their reaction to some financial activities. Financial Systems and Institutions Stud Name: Liang CHEN Stud ID: 270184LC USN: 07118668642232PART 1.The primary function of the financial system is to facilitate the allocation and deployment of economic resources, both spatially and across time, in an uncertain environment. This function, in turn, encompasses a payments system with a medium of exchange; the transfer of resources from savers to investor -users of the resources (and the eventual repayment to the savers); the gathering o f savings for the purposes of pure time transformation (i.e., deferral/smoothing of consumption); and the reduction o f risk through insurance and diversification. The operation of a financial system involves real resource costs, such as labor, materials, and capital employed by financial intermediaries (e.g., banks, insurance companies, etc.) and by financial facilitators (e.g., stock brokers, market makers, financial advisors, etc.). Further, since multiple time periods are an inherent characteristic of finance, there are also uncertainties about future states of the world that generate risks. For risk -adverse individuals, these risks represent costs.The possibility of new financial products/services/instruments that can better satisfy financial system participants demands is always present. Viewed in this context, a financial innovation represents something new that reduces costs, reduces risks, or provides an improved product/service/instrument that better satisfies participants demands. Financial innovations can be grouped as new products (e.g., adjustable rate mortgages; exchange-traded index funds); new services (e.g., on-line securities trading; Internet banking); new production processes (e.g., electronic record -keeping for securities; credit scoring); or new organizational forms (e.g., a new type of electronic exchange for trading securities; Internet-only banks). Of course, if a new intermediate product or service is created and used by financial services firms, then it may become part of a new financial production process.There are close analogies with familiar forms of innovation in non-financial contexts. There we see new products (e.g., DVD players; self-stick postage stamps); new Financial Systems and Institutions Stud Name: Liang CHEN Stud ID: 270184LC USN: 07118668642233services (e.g., Internet based retail shop ping); new production processes (e.g., improved processes for manufacturing computer chips) and new organizational forms (e.g., the M-form decentralized corporate structure). And innovations in producer goods are often essential for innovations in production processes.Much of the research attention to innovation focuses on the new idea. But at least as important is the adoption and spread of an innovation - its diffusion - across an industry. Indeed, faster diffusion means a higher societal return on the underlying investments in the innovation.Because of these, decline in activities of financial institutions is must. The simplest explanation is saving enormous labor, money and time, in other words, financial innovation means make more money in the least cost of money and time. Financial innovation makes the financial regulatory unified. Before, we need to set different regulatory rules for different products in different markets. Now, after financial innovation, we only need to set few but unified regulatory rules for different markets in different countries, which is more convenient and efficient for the whole world.Financial innovation can make monetary integration, euro is the best production. Monetary integration can greatly reduce the transfer coat among different banks in different countries. The major impulses to successful innovations over the past twenty years have come; I am saddened to have to say, from regulation and taxes. The list of tax and regulatory induced products would include zero coupon bonds, Eurodollar Eurobonds, various equity-linked structures used to monetize asset holdings without triggering immediate capital gains taxes, and trust preferred structures. If we think of taxes as a major “imperfection” added to the M&M world, then the search to maximize after-tax returns has arguably stimulated much innovation, and changes in tax law in turn stimulate even more innovation. For example, variou