Financial System Flashcards
what is the financial system
transfers funds from surplus unit to deficit unit- surplus lends, deficit borrows
important for saving and investment, also economic growth
well functioning financial system promotes efficient resource allocation. capital allocated to the the most productive firms and orgs
poorly functioning financial system can explain low development and poverty. allocated capital doesn’t provide potential growth, as going to non productive sectors
difference between direct and indirect finance
direct is where borrowers obtain funds directly form lenders
indirect they go through an financial intermediary
problems of direct finance
-complex needs of borrows not matched
-lenders want to lend for short and borrows demand for long term
-if needs not in line, transaction doesn’t take place
-transaction cost and info asymmetry is strong-
role of financial system
heart of economy supplying finance, enables the transfer of payment and enables the agents to manage risk
provides mechanisms that allow the transfer finds between surplus and deficit agent
-surplus- risk averse with short-term horizon
-deficit- risk taker with med/long-term horizon
-mechanisms are payment and risk management
LIBOR
London Interbank Offered Rate
-rate at which Large banks is willing to lend to other banks of top creditworthiness
or
-the rate offered by a group banks at 11:00 am for a given currency: reference rate used as a benchmarks for agreeing rates between two parties for loans, FRA’s and other instruments
Fixed Rate
an interest rate or coupon is determined when the instrument is issued and remains fixed throughout its life
floating rate
interest rate changes in line with market conditions at certain predetermined times
key roles of financial center and how do they differ?
number of roles to play such as:
-recycle funds from surplus to deficit agents as efficiently as possible
-act as a medium of exchange
-provides a range of financial services
London vs New York financial centers
-London claims to be a pre-eminent financial center- heavily dependent on international business. result from high number of foreign firms on UK stock market
-New York claims to be a preeminent financial center by the size of us economy- domestic
what are the 2 board categories of financial intermediary
-depository (monetary FI) institutions- commercial banks, building societies, credit unions, saving and loan associations
-Non-depository financial institutions- insurance companies, pension funds, investment banks , mutual funds
