Financial System + Market
Fin system
Functions
fin market
Fin institution
def
roles
required by the government to operate within established regulatory guidelines.
intermediaries by channeling the savings of individuals, businesses, and governments into loans or investments
key customer
provide services for a fee
accept customers’ savings deposits and lend this money to other
directly or indirectly pay savers interest on deposited funds
invest customers’ savings in earning assets
accept customers’ savings deposits
key suppliers of funds and the key demanders of
funds are individuals, businesses, and governments
net supplier: individuals
net demander: firms + gov
save more than borrow
borrow more than save
key markets
def
forums in which suppliers of funds and demanders of funds
can transact business directly
capital market
`money market
liquidity: low
instrument : short-term debt, or marketable securities, which are short-term debt instruments
Instruments: Long-term securities
commercial paper
U.S. Treasury bills
negotiable certificates of deposit
Flow of funds
lliquidity: high
maturity: 1 year or less
Repurchase agreements
interbank loans
maturity: >1y
func
some need of seasonal or temporary financing, other wish to invest in a relatively safe, interest-bearing asset
Transmit economic information
Price discovery from supply and demand
bond (debt)
stock (equity)
others
preferred stocks
convertible bonds
limitation
Clearing and settling payments
• Pooling resources and subdividing shares
• Transferring resources across time and space
• Providing information
• Dealing with incentive problems
participants
Banks, finance companies
• Insurance companies
• Pension funds, hedge funds
types
Broker Markets and dealer Markets
primary vs secondary
lim
fix
Expensive for small businesses to issue new securities and be compliant with legal requirements
• Market volatility: for example, due to herding behavior
• Asymmetric information
Listed firms are required to disclose certain financial information
• In an efficient market, a firm’s stock price reflects all relevant information about the firm
Asym?
• Managing risk