Chapter 1 - financial overview Flashcards
financial markets are crucial for
producting an efficient allocation of capital
higher liquidity….
makes it easier for the issuing firm to sell in the primary market
Saving may also be channelled to financial intermediaries through
financial markets, or to financial markets through financial intermediaries
flows of funds in a firm
Savers – financial markets or intermediaries– financial officer — firms’ operations
§FINANCIAL RELATIONS between EAS and EAD:
§They are implemented through financial assets (FA) –issued by EAD; primary-
§They are channelled through the financial markets (FM)
§They are provided by financial institutions (FI)
A FS can be studied from three points of view:
Financial Institutions
nFinancial instruments (FA and monetary policy measures)
nFinancial Markets
REASONS FOR THE EXISTENCE OF A FS
Savers and investors preferences do not match:
*RETURN
*RISK
*LIQUIDITY
financial system
1st reason MEDIATION FUNCTION (direct financing)
Contact of grantees and funding applicants
Mediators (brokers and dealers) and financial intermediaries (banks,…)
2nd Reason INTERMEDIATION FUNCTION (transformation, indirect financing)
To transform the primary FA issued by EAD in secondary FA more in line with the preferences
of the majority of savers
Financial intermediaries (banks, investment funds, pension funds, insurance companies..)
Financial System: Mediation and intermediation functions… HOW DOES IT ACTUALLY WORKS?
??
Financial System Efficiency
Larger Efficiency of a Financial System: the more saving and in better conditions for economic agents it
is able to capture and channel towards productive investment
With this aim, the Financial System should articulate the necessary mechanisms to bring together
savers and investors and adapt to the preferences of both groups of agents
THE CAPTURE AND CHANNELLING OF SAVINGS must be done within a
stable framework (from a
monetary, financial and political point of view) Þ every FA is subject to regulation and supervision by
the economic, monetary and financial authorities with a dual objective:
Stability of the FA
in order to ensure the proper functioning of markets and to monitor the
solvency of financial institutions
Protection of financial services consumers,
especially those most in need of such protection by
not having the resources and knowledge (CNMV –SEC-)
A financial asset is a
title ,or simply an accounting annotation, whereby the purchaser acquires the
right to receive a part of seller’s future income
or
Means or instruments used to perform the transfer of financial resources from an economic agent
(EAS) to another (EAD), constituting the material aspect of a financial flow normally.
“A financial asset is an asset and a
liability at the same time”
It is both a way of keeping wealth for their owners, and a
a liability or debt to the economic units
that generate it
Functions of FA
Instrument of transfer of FUNDS
*From the acquirer to the issuer
b) Instrument of transfer of RISKS (depends on the type of FA)
*Issuer’s INSOLVENCY risk
*TO BUY A FA implies to assume part of the risk of the investment that the transferred funds will finance
characteristic
a) Return
b) Risk
c) Liquidity
!Degree of relative liquidity (more to less liquidity)!
a) Currency: coins and legal tender banknotes
b) Deposits (current accounts)
c) Savings Deposits (savings accounts)
d) Term Deposits (Fixed-term deposits)
e) Short-term Public Debt: Treasury Bills
f) Commercial paper
g) Medium and long-term Public Debt:
medium term: State Bonds (maturity: 3 to 5 years)
long term: State Bonds (maturity: 10, 15, 30 and 50 years)
h) Medium and long-term corporate debt
i) Shares:
Shares traded on the Stock Exchange
Non-listed shares
Financial Markets:definition
Set of mechanisms (procedures) or space in which the trading of financial instruments
among economic agents is undertaken and the prices of FA are determined.
Functions of FM
- Facilitate the contact between investors and providers of funds
- Determine the price of financial assets
- Provide liquidity to financial assets
- Reduce transaction costs ® costs associated to financial assets’ negotiation
CHARACTERISTICS OF FM
a) Breadth
b) Transparency
c) Freedom
d) Depth
e) Flexibility
CLASSIFICATION
FA. Classification:
1. According to the issuer
a) ECB-EUROSYSTEM: it issues the legal tender banknotes
b) Public Treasury: it issues the coins and all the public debt securities (Treasury Bills, Bonds)
c) Banks: they issue deposits of any kind; they also issue fixed-income securities and equity
d) Non-financial firms: they issue, when being joint-stock companies, equity; they may also
commercial paper (short-term fixed-income securities); and any medium and long-term
fixed income security (bonds)
1.5.- Functions and classification of Financial Intermediaries: indirect financing
Set of institutions specialized in the mediation between lenders and borrowers of the
economy and the transformation of financial assets
BASIC ACTIVITY’S AXIS
To lend and borrow funds
FUNCTIONS
MEDIATION
INTERMEDIATION OR TRANSFORMATION
How do they transform FA?
They buy primary FA as an investment and on the basis of those FA they issue (create)
secondary FA (e.g. current accounts, term deposits, insurance policies, bonds) that are
sold to savers
Advantages of financial intermediaries
At a general level, you can say that these advantages derive from the existence of economies
of scale, i.e. to operate with large amounts of funds.
1 Reduce the cost of collecting information
2 Diversification of risks
3 Staggered maturities of its operations
- When granting financing, they manage higher quantities of funds
- When transforming primary FA into secondary FA, they incorporate their
solvency to the latter
Dealers:
financial agents who operate on their own account, i.e., buy and sell financial assets on
their own account
They do not create new FA (do not transform FA), but they do assume risks
Example: Securities firms (Sociedades de Valores)
Brokers:
financial agents that operate on behalf of others and are involved in the process of
channelling the savings towards investment by putting in contact applicants and suppliers of funds
in exchange of charging a commission Individual or firm which acts as an intermediary between a
buyer and seller, usually charging a commission.
Classification: Brokers, dealers and financial intermediaries
They do not create new FA (they do not transform FA) and do not assume risks in their financial
operations
Example: Securities Broker (Agencias de Valores)
Financial Intermediaries:
may act as brokers (on behalf of others) and dealers (on their own account)
Main characteristic: they transform FA (and create new FA)
Example: Banks, insurance companies, mutual funds, pension funds….
Classification of financial intermediaries
A) MONETARY FINANCIAL INTERMEDIARIES (banking)
B) NON-MONETARY FINANCIAL INTERMEDIARIES (non-banking)
A) MONETARY FINANCIAL INTERMEDIARIES (banking)
1.Bank of Spain
2.Other monetary financial institutions (banking system)
2.1. Banks
2.2. Savings Banks
2.3. Cooperative Credit Societies
B) NON-MONETARY FINANCIAL INTERMEDIARIES (non-banking)
- Credit Finance Entities
- Collective Investment Institutions: Investment Societies and Funds
- Insurance companies and pension funds
