Chapter 1 Flashcards
FIs are corporate entities whose primary business are __________
financial intermediation activities
The Four Pillars of Financial Intermediation are:
- banking
- IB & securities trading
- trust or fiduciary
- insurance
How are FIs capital structure different from other corporate entities?
very high leverage
The 5 Classifications of FIs are: DTIs Finance Companies, Securities & Brokerage Firms, Investment Funds, and \_\_\_\_\_\_\_\_\_\_\_\_\_
Insurance Companies
The 5 Classifications of FIs are DTIs, Finance Companies, \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_, Investment Funds, and Insurance Companies
Securities & Brokerage Firms
The 5 Classifications of FIs are: DTIs Finance Companies, Securities & Brokerage Firms, \_\_\_\_\_\_\_\_\_\_\_\_\_, and Insurance Companies
Investment Funds
FI Assets in Canada are dominated by ____
Banks
FIs often offers a wide set of financial services and functions compared to the 1970s because of:
increased deregulation;
technological and financial innovations;
competitive pressures
What are two advantages of universal banks?
cross-selling benefits;
diversification
Holding companies are FIs structured with __________.
controlling ownership of multiple subsidiaries offering multiple products
FIs link the _____ side and the _____ side of financial markets.
demand, supply
FIs _________ between financial (demand-supply) counterparties and overall market through several special roles
facilitate the flow of funds
Consequences for investors without FIs
info asymmetry; lack of monitoring; much less liquidity; high fair price risk; investment risks outweigh returns
Two Functional Roles of FIs are:
Brokerage and Asset Transformation
Brokerage act as ___ agents on behalf of customers and provide info & facilitate transactions
passive
Asset transformation roles act as ____ agents transforming primary securities into specialized products for customers
active
FIs are susceptible to ___ and are sources of ____ externalities
risks;
negative
FIs warrant more diligent __________ & strict _____ to a far greater extent than other corporations
risk management;
regulation
Panic Runs or Bank Runs:
if one major bank fails,
customers of other banks panic and market becomes
bearish
Very large volume of inter-FI borrowings/lendings and
financial transactions can result in:
strong interdependence of cash flows & interlinking of
financial fortunes
Net Regulatory Burden equation:
= Costs of regulation – Benefits from regulation
2 key factors that define the degree of regulation
- what is the economic role of the FI in the financial system and what are likely systematic consequences if the FI fails?
- who are the key customers of the FI and what consequences they face if the FI fails?
Safety and soundness regulation:
e.g., banks need to diversify,
maintain reserves and liquidity, disclose info, etc.
Monetary policy regulation:
e.g., controls inside and outside
money of banks
Credit allocation regulation:
e.g., banks must make loans to socially important sectors
Consumer protection regulation:
e.g., protect customer deposits and investments via insurance
Investor protection regulation:
e.g., regulation of trading activities of FIs to prevent frauds and insider trading
Entry regulation:
e.g., regulation of new startup FIs or foreign entrants
Post Financial Crisis trends resulted in:
Increasing trend of deleveraging - decline in debt-to-equity ratios;
Increased regulations;
Greater reliance on risk management practices
