How the Financial System Works: The Whole Map, With 2026 Numbers

The financial system is the set of institutions, markets and pipes that move money from people who have it to people who want to use it, and that put a price on that money. In the US, the Federal Reserve sets the price of overnight money, banks create most of the money people spend when they make loans, markets price longer loans (bonds), ownership (stocks) and risk transfer (derivatives), and a layer of payment, clearing and custody systems makes sure each trade actually settles.

Scope. This map is US-centred, with the global links that matter most to a US investor: the dollar, foreign exchange and cross-border payments. It covers money, the central bank, banks and credit, Treasuries and the yields by maturity, repo and money market funds, stocks, commodities, futures, options, clearing, settlement, custody and how shocks spread. It does not cover insurance, pensions, crypto or tokenized assets in detail, and it is education, not investment advice. Sizes are dated snapshots from the Fed, the Treasury, the BIS and industry bodies; they move every week.

Read the map top to bottom. The top layer sets the price and supply of the safest money. The middle layer turns savings into loans and investments. The markets row is where those claims are priced and traded. The pipes at the bottom are invisible until they break. The rest of this guide walks through each layer, then shows how a shock crosses from one to the next.

The bond market is slightly larger than the stock market worldwide: $160.7 trillion of bonds against $157.8 trillion of stock market value at the end of 2025 (SIFMA Capital Markets Fact Book). But sizes only compare cleanly when they are the same kind of number. Three kinds get mixed up in headlines: balances (what exists on a date), flows (what changes hands per day) and derivatives notional (the face value contracts refer to, not money at risk). They are shown separately below.

Balances: amounts outstanding on a date, in trillions of dollars.

Flows: average value that changes hands per day, in trillions of dollars. A flow can exceed a balance many times over a year because the same dollars and securities turn over again and again.

Derivatives: notional is a reference amount used to calculate payments, so it vastly overstates what could be lost. At the end of 2025, over-the-counter derivatives had $844.6 trillion of notional, $22.8 trillion of gross market value (what it would cost to replace the contracts) and $3.4 trillion of gross credit exposure once legally enforceable netting was applied, before collateral (ISDA, using BIS data).

Check the netting step yourself: 1 − ($3.4T ÷ $22.8T) = 1 − 0.149 = 85.1%, which matches ISDA’s 85.3% once the unrounded figures are used. The full walk from notional to real exposure is in how big the derivatives market really is. For scale against the whole system: non-bank financial institutions held $256.8 trillion, 51% of global financial assets, in 2024 (Financial Stability Board).

Most money people use is a bank deposit, and banks create deposits when they make loans; the Fed creates a different kind of money, reserves, which only banks hold. The Bank of England put it directly: “the majority of money in the modern economy is created by commercial banks making loans” (Bank of England, 2014). US reserve requirements have been zero since March 26, 2020 (Federal Reserve), so the textbook 10% “money multiplier” no longer describes the US. What limits lending instead, step by step, is in how money is created.

The Fed controls the price of overnight money, not the price of every loan. On September 16, 2026 it raised its federal funds target range by a quarter point to 3.75%–4.00% (FOMC statement, 12–0 vote), and on October 28 it held the range there (FOMC statement, 10–2 vote). It holds overnight rates inside that band with administered rates rather than by rationing reserves: 3.90% paid on banks’ reserve balances, a 3.75% overnight reverse repurchase facility that sets a floor for money funds, and a 4.00% standing repo facility that caps what dealers pay (implementation note, October 28, 2026). On October 22, 2026 the effective federal funds rate printed at 3.88% (New York Fed). Detail: how the Fed sets interest rates.

The Fed also sets the quantity of reserves through its own balance sheet. It buys securities to add reserves and lets them run off to drain them. On October 21, 2026 it held $6.75 trillion of assets, mostly $4.57 trillion of Treasuries and $1.90 trillion of mortgage-backed securities, funded by $2.96 trillion of bank reserves, $2.49 trillion of currency and $0.95 trillion in the Treasury’s cash account (Fed H.4.1 via FRED). Its size swings most in emergencies:

More on the mechanics in quantitative easing and tightening and the fed funds rate.

Banks sit between the Fed and everyone else: they hold reserves at the Fed, take deposits, and lend to households and firms. US commercial banks held $19.81 trillion of deposits and $14.21 trillion of loans and leases on October 14, 2026 (Fed H.8 via FRED). A bank’s lending is limited by its capital (losses come out of it), its liquidity rules (it must be able to pay depositors who leave), borrower demand and the rate it has to pay for funding, which is where the Fed’s band comes in.

Credit also flows outside banks. Companies borrow by selling bonds to funds and insurers, and money market funds, hedge funds and private credit funds lend without taking deposits. That non-bank side held 51% of global financial assets in 2024 (FSB, above). Its role is covered in what shadow banking is. For the extra yield lenders charge over Treasuries, see the glossary entry on that extra yield.

US Treasuries are the base layer of pricing: almost every other loan is priced as a Treasury yield plus a spread, and Treasuries are the main collateral in repo. Marketable Treasury debt was $31.83 trillion on September 30, 2026 (Treasury, Monthly Statement of the Public Debt); total public debt was $40.44 trillion on October 22, 2026, including debt held in government trust funds (Debt to the Penny).

Lined up by maturity, those yields form a curve. On October 22, 2026 the 3-month bill yielded 4.22%, the 2-year note 4.65% and the 10-year note 4.96% (US Treasury via FRED), so the curve sloped upward and long rates sat above the Fed’s band. That is why a Fed hike does not move mortgages one-for-one: mortgages follow the 10-year yield plus a spread. Bond prices move against yields; the auction, ownership and price math is in how the bond market works and the glossary entry on yields by maturity.

Repo is the overnight loan market that funds the bond market: a borrower sells Treasuries and agrees to buy them back the next day at a slightly higher price, so the lender holds collateral the whole time. US repo averaged about $12.6 trillion in daily exposures in Q3 2025 (Office of Financial Research, December 2025); in the second half of 2025 money funds, government-sponsored enterprises and other funds lent about $3.5 trillion net, and hedge funds borrowed more than $1.8 trillion net (OFR, March 2026).

This is where the Fed’s band meets the market. Money market funds held $7.94 trillion in the week to October 21, 2026, $6.54 trillion of it in government funds that invest in bills and repo (ICI). When they have spare cash they can park it at the Fed’s overnight reverse repurchase facility, which peaked at $2.55 trillion on December 30, 2022 and was down to about $0.2 billion on October 23, 2026 (New York Fed via FRED): the cash had moved back into bills and private repo.

Worked example (illustrative). A money fund lends $100 million overnight to a dealer at 3.90%, the rate the New York Fed’s secured benchmark printed on October 22, 2026, and takes Treasuries worth $102 million as collateral, a 1.96% haircut, equivalent to collateral worth 2% more than the cash lent. One night of interest on the 360-day money market convention is $100,000,000 × 0.039 ÷ 360 = $10,833. If the dealer failed, the fund would sell the collateral; it is covered unless the Treasuries fall more than $2 million ÷ $102 million = 1.96% before they are sold. That is why collateral quality and haircuts decide who gets hurt in a crisis.

Two dated changes are coming: the SEC requires eligible cash Treasury trades to be centrally cleared by December 31, 2026 and eligible repo by June 30, 2027, and the OFR estimates the repo step could add slightly more than $500 billion a day to the volume behind the secured benchmark (OFR, October 20, 2026). The full mechanics are in what is the repo market.

Stocks are ownership claims priced off the same rates: a higher 10-year yield raises the discount rate applied to future profits. The US stock market was worth $68.9 trillion at the end of 2025, and an average of 17.6 billion shares traded a day that year, a record (SIFMA). A trade you place passes through four hops before you own the shares.

Holding shares in “street name” through a broker and a depository is normal and does not mean someone else owns them; your broker’s records show you as the beneficial owner, and broker failures are covered separately (see SIPC coverage for large accounts). The order-to-custody walk, including order routing, is in what happens when you buy a stock.

Derivatives let people trade the risk of an asset without trading the asset, and they link back to it through hedging. Futures are standardized agreements to buy or sell later at a price set today; gains and losses are settled in cash every day through a clearinghouse. Options give the right, not the obligation, to buy or sell. Volumes are large and rising: OCC cleared 15.2 billion listed options contracts in 2025, up 24.4% (OCC), and CME Group averaged a record 28.1 million contracts a day (CME Group).

Commodities are priced largely in futures markets, which is how a supply shock reaches everyone else. Brent crude went from $61.98 a barrel on January 2, 2026 to $138.21 on April 7, 2026 and was $115.22 on October 20, 2026 (EIA via FRED). Hedgers use futures to lock in prices; speculators take the other side.

For the mechanics, see how futures work and how options affect stock prices. For one practical use, see inflation hedges.

Dollars move abroad as entries between banks that hold accounts with each other, and the dollar legs settle in US payment systems. Fedwire Funds moved an average of $4.59 trillion a day in 2025 (Federal Reserve Financial Services) and the private CHIPS system $2.01 trillion a day (The Clearing House). The message that instructs a payment and the money that settles it travel on different rails.

The dollar sits on one side of 89% of all foreign exchange trades, in a market that turned over $9.6 trillion a day in April 2025 (BIS), and made up 56.70% of central banks’ disclosed foreign exchange reserves in the second quarter of 2026 (IMF COFER). That is why a Fed decision travels abroad through the exchange rate. What this means for a portfolio: dollar exposure. The plumbing behind it is in how money moves between countries.

Shocks spread through funding and collateral faster than through losses. A loss somewhere makes lenders pull short-term funding or demand more collateral; borrowers sell assets to raise cash; falling prices cut collateral values for everyone holding the same assets; and the cycle repeats until a backstop, usually the central bank, stops it.

Sources: Fed H.4.1, H.8, the target range and Treasury yields via FRED; New York Fed rates; BLS CPI; EIA Brent; causes of 2019 from the Fed’s own review (FEDS Notes, 2020) and of 2008 from Federal Reserve History. The 2026 row describes what has happened so far, not where it goes next.

Liquidity is not the same as insolvency. A bank or fund with good assets can still fail if it cannot turn them into cash fast enough (liquidity); one whose assets are worth less than its debts is insolvent whatever the backstop. Central bank lending against collateral is built for the first problem and cannot fix the second. The 2023 bank runs mixed both: losses on long bonds weakened capital, and uninsured depositors left in days. Each episode is taken apart in how financial crises spread; the market side is in the history of stock market crashes and why correlations rise in crashes.

The map shows the normal direction of money. In a crisis, arrows reverse: depositors pull cash from banks, money funds stop lending to dealers, and the Fed becomes the lender to almost everyone. Treat the arrows as plumbing that usually works, not as a guarantee.

Who should not lean on it: anyone looking for a trading signal. How the system works says little about what prices do next week. It is most useful for reading headlines (“repo stress”, “the Fed hiked but mortgage rates fell”) and for checking whether a portfolio depends on one part of the system working, such as cash held above insurance limits. For day-to-day use, the rate-sensitivity side is in how rate changes hit a portfolio and the macro side in cross-asset signals explained.

Disclosure: Exent is our product, and Market Intel 101 is a set of 26 lessons inside its Market intel membership. The table shows which lessons go deeper on which part of this map; this page stays a free, complete overview, and the lessons are not needed to follow it.

The lessons do not cover futures, options and swaps, commodities, credit markets or crisis case studies beyond 2019; those parts of the map are covered only by this page and the free guides linked from it.