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Lecture 1: Why are financial institutions special? (Introduction (page 5),…
Lecture 1: Why are financial institutions special?
Introduction (page 5)
Information costs
Agglomeration of funds reduce Principle- Agent problem
greater incentive for information collection and monitoring activities (free- rider problem and delegated monitor)
development of new secondary securities to more effectively monitor
Liquidity and price risk
high liquidity
ability to diversify some of existing portfolio risk
Other special services
Reduced transaction cost (economies of scale)
Maturity intermediation
(?): ability to bear the risk of mismatched assets and liabilities
The transmission of monetary policy
: impact of cash rate on FIs
Credit allocation:
major source of finance in particular sectors
of an economy
Intergenerational wealth transfer or time intermediation
Payment services
Denomination intermediation
Problems and risks if services are not provided
Safety and soundness regulation (4 layers of protection)
Monetary policy regulation
Credit allocation regulation
Consumer and investor protection regulation
Entry regulation
Financial institutions' specialness
FIs stand between households and the corporate sector
2 major functions
brokerage function: economies of scale
inter- mediation (asset- transformation) function
primary securities: bonds/equity issue by company and back up by their own security
secondary securities: FIs issue bonds/ equity that back up by the primary securities
Resolve the costs facing an individual making a direct investment
The changing dynamics of specialness (p.22)
Future trends (p.24)
Global issues
More competition amongst banks globally
More linkages
Role for
Basel regulations
Impact of GFC
banking model shift from 'originate and hold' to 'originate and distribute'
prevalence of loan securitisation