Week 9: FM302 - Tutorial Questions
October 16, 2020
1. Domestic savings can be an important source of nancing in-
frastructure needs? Do you agree or disagree, with supporting expla-
nations.
Region can use domestic savings to nance these infrastructure needs. How-
ever, countries are excessively dependent on volatile capital in ows for its devel-
opment. Financial sectors in the region are ill-suited to facilitate this transfor-
mation and to mobilize large savings. Financial sector is dominated by short-
term bank lending. Short-duration of bank's liabilities (example deposits) limits
their ability to nance long-term investments such as home loans and infras-
tructure investments. Bank-centered nancial systems (operations in terms of
lending requirements) lead to a supply-demand gap in lending to small and
medium-sized enterprises (SMEs).
2. Why nancial sectors in small and developing economies can
be ill-suited to facilitate infrastructure needs?
The dominance of bank has come at a cost of underdeveloped equity and
bond markets in most countries. The region suers from a supply-demand gap
between funding (bank lending, equity and corporate bond funding) and invest-
ment ( nancial deposits, mutual, pension and insurance funds) This gives rise
to the cost of capital and dependence on foreign investment to nance local
funding needs.
3. Dierentiate between maturity mismatch and currency mis-
match.
Maturity mismatch: it occurs when a bank has substantial long-term assets (e.g.
xed rate mortgages) funded by the short-term liabilities (e.g. deposits).
Currency mismatch: having assets that are denominated in a dierent cur-
rency than liabilities, so changes in exchange rate between currencies can have
positive or negative eect on balance sheet (currency risk).
4. In what sense are banks dominant sector in many developing
countries in the Paci c?
Banks are most widely used for nancing short-term invest. Banks keep huge
amounts of savings for households, because other markets like bonds and stock
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are not so liquid.
5. Explain features of a liquid market.
In liquid markets, investors can convert their stocks to cash without causing
drastic change in the asset price. Liquid markets allow for rapid exit from a
stock when the share price falls. Liquid markets are seen as more attractive
than illiquid markets by institutional investors.
6. Discuss measures to improve liquidity in the stock market.
Many companies can be encouraged to list on the stock exchange. This will
facilitate liquidity on the market by regulators of the various industries. Can be
achieved through persuasion, dialogue, collaboration, policy setting and mutual
consent. The requirements for raising equity on the market determined by reg-
ulators should not discourage rms from listing on stock markets. Transaction
fees can be reduced to attract more people to trade on the Stock Exchange.
Education and training to increase investor knowledge of the role of the stock ex-
change in the country's development. Securities and Exchange Commission can
persuade all rms within their jurisdictions to include education of the public, as
a license renewal requirement. Liquidity could be improved by privatization of
state-owned enterprises through stock exchange. Regulators should consider the
impact of new nancial products on nancial stability, however, these consider-
ations should not deter investment banking rms from developing more products
7. Explain the hierarchical order of nancial markets.
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Discuss each in turn ...
8. What are some reasons for underdeveloped corporate bond
markets?
A reason for underdeveloped corporate bond market can be higher cost of issuing
corporate bonds Due to higher volume of documentation required in comparison
to bank lending.
9. Why is it di cult to establish a dynamic corporate bond or
stock markets for small countries?
It can be irrational to establish corporate bond or stock markets for some small
countries Because of low volume of transactions make these markets unprof-
itable. So.. small economies can create a trading link among themselves which
connects their capital markets. Such links make it easy for investors to trade
in other countries' bond markets. But. . . this requires harmonization of reg-
ulations, corporate governance and nancial products for mutual recognition
of their trading transactions, A well-developed corporate bond markets require
well operated infrastructure, standardized credit rating systems, risk manage-
ment products, and a functioning legal and regulatory framework.
10. Based on the data provided in the lecture (Week 8 Lecture
slides), which country has the:
(a) largest lending-deposit spread?
(b) highest non-performing loans?
(c) highest and lowest Private credit by deposit money banks and other
nancial institutions to GDP (%)
(d) highest bank cost to income ratio
(e) lowest and highest bank non-performing loans to gross loans (%)
(f) positive and negative ROA and ROE? (g) increasing trend of z-score and
decreasing trend of z-score? What can you conclude in each case?
11. What does it mean when countries have bank credit to bank deposit
ratio: (a) close to 100%? (b) above 100% (c) below 100%
12. Discuss the merits and demerits of nancial openness?
Market access has eased for foreign investors through progressive capital account
liberalization. In some countries there are limits placed on nonresidents to hold
and trade domestic securities. Some countries have foreign exchange restrictions
which adversely aect the decision of foreign institutional investors.
However, foreign-exchange-related restrictions help mitigate vulnerabilities
from short-term foreign borrowings.
13. Discuss key impediments facing foreign investors?
Poor legal and regulatory system
Weak market infrastructure
Capital controls
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Taxation
Unavailability of foreign exchange hedging instruments
14. Based on your own assessment and readings, discuss the pos-
sibility or feasibility of expanding nancial markets in the Paci c re-
gion. What are some of the challenges or constraints for developing
nancial markets like the markets for derivative products.
See above and make your own notes.
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