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Banking and Financial Markets - Coggle Diagram
Banking and Financial Markets
Barter => Commodity money (gold) => Fiat money (currency) => the M1-M2-M3 measure of money
Market for Lemons
Peach
high expected Profit and low Risk
Lemons
Low expected Profit and high Risk
Analogy - (Buying) Used Car Market
Quality and Uncertainty
Information Asymmetry
Parties to the transaction
do not have same degree of information
Lenders don't have same information
as borrowers have about themselves
Adverse Selection
Fear of selecting a 'Lemon' rather than a 'Peach'
Moral Hazard
Principal - Agent problem
Principal => Stakeholders of the firm
Agent => Managers of the firm
Agents has more information about the firm and less interest to maximize the profits
If market is perfect then Peaches go to the bond market (low borrowing cost) and lemons go to the bank (high borrowing cost)
Vibrant bond and equity stock markets
Developed Countries
Bank based model
Developing countries
Interest Rates
Loanable Funds Theory
Loanable Funds => bank need to keep a part of available money as reserves to comply with regulatory compliance.
(Governement) Fiscal deficit
= Revenue (tax) - Expenditure
Market interest rate is determined by factors that controls the supply and demand for loanable funds.