Week 3 Flashcards
What are the functions of the financial market
indirect finance, direct finance, promotes economic efficiency, and welfare effects
What importance has the financial market?
- Allow lenders and borrowers to be better off –> can get dividend or returns –> promotes economic efficiency
- Beneficial for purposes other than increasing business production –> through mortgages
- Funds move from people with lack of productive investment opportunity to those who do –> can create efficient allocation of capital –> higher production and efficiency
- Can time/plan purchases better –> can improve wellbeing
What is the structure of financial markets?
debt and equity, primary and secondary, exchnage and over the counter, money and capital market
What financial market instruments are there?
money market instruments and capital market instruments
What are the functions of financial intermediaries?
lower transactions costs, reduce exposure of investors to risk, deal with asymmetric information, provide finacial services to customers
What typers of finacial intermediaries are there?
Depository institutions, contractual savings institutions, investment intermediaries
What does the regulations of the finacial system do?
increase information available to investors, ensure soundness of financial system, internationalization of finacial markets
Name the 8 basic facts of the global financial structure
- Stocks are not the most important sources of external financing for business –> most important source is bank lending –> due to the asymmetric information in stocks –> value of stocks as percentage of GDP may be high due to market price of existing stock of shares rise
- Issuing marketable debt and securities is not the primary type of marketable securities way for business to finance operations –> bonds are most significant
- Indirect finance more important than direct finance, where business raise funds directly from lenders in financial markets –> direct finance from primary market is small –> most don’t buy newly issued securities by through intermediaries
- Financial intermediaries (banks) are most important source of external funds used to finance business –> since they can deal well with asymmetric information etc
- Financial system is the most heavily regulated sectors of the economy –> bond have to write prospective, banks have Basel agreements in terms of reserves –> promote soundness of financial system to avoid failures & crisis
- Only large, well established corporations have easy access to securities market to finance their activities –> the asymmetric information of larger firms is small, they are better equipped to deal with it
- Collateral is a prevalent feature of debt contracts for households and business –> collateral: property that is pledged to lender to guarantee payment in event that borrower is unable to make debt payments
- Debt contracts are complicated legal documents that place substantial restrictive covenants on borrowers –> e.g. have to take life insurance as mortgage holders
What does asymmetric information cause in the finacial structure
adverse selection and moral hazard
What is on the liabilities side of the balancee sheet of a bank
transaction deposts/demand deposits, time deposists, bank’s deposits and borrowings, debt and other securities, foreign currency deposits, bank capitals
What is on the assets side of the balance sheet of a bank
reserves, securities, loans, net trading assets, and other assets
What are the four components of bank management?
liquidity management, asset management, liability management, capital management
What are the main reasons for bank regulation?
ensure systematic stability of financial intermediaries, increase information available to investors
What are the categories of financial regulation?
- government safety net
- restriction on asset holdings
- capital requirements (basel accrods)
- prompt collective reactions
- finacial supervision
- assessment of risk management
- disclosure requirements
- consumer protection
what are main disadvantages of financial regulation
moral hazard, cost of compliance, regulatory capture
