Definition of global financial system
This is the interplay of financial companies, regulators and institutions operating on a supranational level. The global financial system can be divided into regulated entities (international banks and insurance companies), regulators, supervisors and institutions like the European Central Bank or the International Monetary Fund.
The system also includes the lightly regulated or non-regulated bodies - this is known as the “shadow banking” system. Mainly, this covers hedge funds, private equity and bank sponsored entities such as off-balance-sheet vehicles that banks use to invest in the financial markets.
As banks lend money to governments, hedge funds and private equity firms, and central banks lend money to commercial and investment banks, the interrelationship between these loans creates the global “systemic” risk, which explains why a “local” crisis such as the US subprime meltdown in 2007 translated into a global financial crisis.