Introduction to Financial Systems (1) Flashcards
Why is the financial system important?
Because it provides... - a set of elements - environment and - rules that allow for the transfer of funds.
Resources of the financial system
NON-FINANCIAL
families provide work, land etc before goods are actually sold
FINANCIAL
families contribute their surplus income as an investment in companies
Elements of the financial system
INSTRUMENTS
financial assets issued by firms, the government… (bank account, share, insurance…)
INSTITUTIONS
financial intermediaries including brokers and retail/investment banks
FINANCIAL MARKETS
where financial instruments are traded
REGULATORY BODIES
Main goal/function of the financial system?
(1) The channeling of savings from spending units (SURPLUS) to spending units (DEFICIT)
(2) Provide financial stability
(3) Avoid crisis
Main problem of the financial system?
TIME INTERVAL
SEARCH COSTS
DIFFERENT TIME HORIZONS
RISK
ASYMMETRIC INFORMATION
When can we consider the financial system efficient?
The financial system is more efficient the more savings are channelled and the more it contributes to economic growth (through transactions)
- EFFICIENT ALLOCATION OF RESOURCES
- FINANCIAL AND MONETARY STABILITY
- FOSTER ECONOMIC DEVELOPMENT
- LOW INTERMEDIARIES COSTS
- SOLVENCY
- PROFITABILITY
STRONG LINK: FINANCIALLY STRONG COUNTRIES - ECONOMIC GROWTH
What is a financial instrument?
Securities or debits emitted by economic spending units which generate a liability or debt over other units, are a means of maintaining wealth for those who buy them.
Primary they are issued in order to balance a temporary situation of treasury deficit.
Do not contribute directly to national wealth.
What are the main functions of a financial instrument?
- Transferring funds
- Transferring risk (as you acquire rights over the issuer’s resources)
- Balance temporary treasury deficit
What are the main features of financial instruments?
PROFITABILITY - instrument’s capacity of producing returns (interest, dividends, tax benefits…) As a short of compensation for renouncing to purchasing power and for assuming the risk
LIQUIDUTY - ease and cost of trading it for cash
RISK - issuer shall comply with payment clauses
How do you classify financial instruments?
(1) who issues them (financial intermediary or ≠)
(2) the nature of who issues (Private // Public)
(3) relative liquidity (how easy is to get your money back)
(4) the market where the transfer takes place (stock market, bond market …)
What is a financial intermediary
Institutions who act as agents and put spending units in contact with each other. This lowers costs and allows for the transformation of the instruments, making them more attractive.
financial intermediary (generates new instruments) ≠ simple agent
Financial intermediaries buy instruments as a form of investment and instead of selling them they create new instruments, which they place with savers, thus obtaining new funds to make further investments. (DEPOSITARY ENTITIES)
THEY CAN SERVE AS AN ALTERNATIVE TO FINANCIAL MARKETS
What are the main functions of a financial intermediary?
- They reduce the cost of search
- They obtain information
- They monitor
- They transform risk and term
- They improve efficiency
- They act as Monetary Policy vehicles
What is a financial market?
Mechanism or place where an exchange of instruments can be carried out, determining their P.
What are the main functions of a financial market?
- Put agents in contact
- Appropriate Price setter (no manipulation)
- Provide liquidity for instruments
- Reduce term and brokerage costs
What characteristics make a financial market the most efficient?
GREAT BREADTH (#instruments) & DEPTH (#sell&buy orders)
GREAT TRANSPARENCY
GREAT FLEXIBILITY
FREEDOM OF ACCESS
