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