CHAPTER 2: DEFICIT Income ≠ expenditures Resolved: transferring excess funds from provider to demanders
FINANCIAL
INTERMEDIARIES &
OTHER PARTICIPANTS FINANCIAL INTERMEDIATION process of indirect financing using fin. Intermediaries as the main route of transferring
formed when market conditions make it hard for lenders of funds to transact with borrowers
FINANCIAL INTERMEDIARIES
beneficial to the economy and the services provided creates opportunities
CREATION OF MONEY Allows creation of money through its bank loan services. Also, existing and new funds to be allocated efficiently
ACCELERATION OF FLOW OF FUNDS BETWEEN ENTITIES
possess the expertise to make sure that funds will flow efficiently. trustworthy than direct borrowers
BENEFITS FROM FINANCIAL INTERMEDIARIES EFFICIENT ALLOCATION OF FUNDS asymmetric information occurs when borrowers have more information about transaction than the banks
adverse selection high risk borrowers is more active than low risk borrower who pay on time. Occurs before a transaction takes place
moral hazard borrowers take immoral risk with the money (lower the chances that loan will be paid back) occurs after the loan is granted
PROCESS OBSERVED SUPPORT IN PRICE DISCOVERY
process of setting a price which is acceptable to a buyer and seller
obtaining of funds from providers improved liquidity for lenders lenders is enhanced through fi and have better liquidity compared to directly lending funds to providers
lender or investing fund obtained to the fund demanders low risk: deposits to lenders
reduced price risk for lenders prices of financial instrument may vary over time. FI OFFER
this process permits fi to convert financial assets that are high risk: shares, bonds and property to borrowers
not attractive to most investors into another financial asset - as a
liability of the fi - that are more favored by the general public process of investing funds in a portfolio of assets that have individual returns that do not move at the same direction together
diversification of lenders
RISK refers to uncertainty regarding the return an investor will earn on their invested assets
occurs when fixed costs are optimized per unit as a result of sheer volume of transactions
TRANSFORMATION ECONOMIC FUNCTIONS
factors economies scale cost per transaction is reduced as the number of transaction increases
maturity intermediation
Transaction cost cost associated with trading or managing funds and investment
main economic scale
converting long-term assets into shor-term by extending loan to Research cost cost incurred to monitor performance of potential companies to be invested in through economic, industry, financial analysis
borrowers based on the time they need it and giving financial assets
to depositor for their desired investment prospect payment system financial system serves as the main structure for making payment
risk reduction through diversification risk mitigation pertain to the uncertainty that something untoward or damaging may occur to a person or entity
implementation of monetary policy function providing best mechanism to allow the government to implement its monetary policies
converting more risky assets to less risky assets through sharing of risks
cost reduction for contracting and infomation processes
information processing cost refers to the cost of acquiring and processing needed to evaluate purchase or subsequent sale of a financial instrument
contracting cost refers to the cost incurred for writing loan agreements and enforcing terms of agreements to the concerned parties. incurred by investors who are willing to extend loans to a
consumer or business.
liquidity risk refers to the risk that liability holders may require cash in exchange of the financial claims they have from institution
CLASSIFICATION
depository institutions investment intermediaries
firms that accept cash deposits objective maximize return from investments in various financial instruments to add value for the investors
authorized to accept drafts/checks and issue assset management firms manage funds owned by someone through buying and selling of instrument
commercial banks
letters of credit. operate by universal banks
regulated investment companies sell shares to general public in exchange of cash
primarily mobilized small savings and provide loans
thrifts banks
at longer and easier terms
types of RIC
accumulating savings deposits, and investing in
savings bank
marketable bonds etc.
open-end funds close-end funds
Individual banking financial instruments of individual
financial and non financial corporations mutual funds, do not have fixed number of shares have fixed number of shares upon its inception and do not issue
type of accounts handled
Institutional banking additional or redeem shares
and government entities
global banking commercial banks contend with investment bank exchange traded funds like mutual funds but the shares of the portfolio funds trade in an exchange
banks demand deposits / can be withdrawn upon demand through developed to cater sophisticated investor
hedge funds
checking accounts checks organized as a private investment partnership or offshore investment corporation
types of deposit same with demand but no maturity and earn separately managed accounts specialized funds, solely dedicated to an individual or institutional investor
savings deposits
accounts interest at a level below market interest rate
passive funds managed to mimic movements in the market index
money market demand account slightly higher interest rates strategies
active funds managed by asset management with intention to outperform the index fund
time deposits have fixed maturity date
investment banks
highly leverage institutions that have significant influence on how primary and secondary market works
assist entitioes in raising money to fund their initiatives
public offering of securities
contractual savings institutions
private placement of securities
obtaining funds at periodic interval based on an existing contract trading of securities
insurance companies offer services to assume risk or become underwriters of the risk advisory services for mergers, acquisitions and financial resturcturing
Activities offered
pension funds merchant banking
securities finance and prime brokerage services
asset management
research
household sector individuals, families, farmers, retailers, professional partnership
finance companies raise their funds through issuing stocks and bonds or selling commercial papers
focused on regulating ll participants in the market. NGA, LGU, GOCC
government
raises funds through bureau of treasury
depository institutions, investment banks, asset management and insurance companies
financial corporation
OTHER PARTICIPANTS sectors act as financial intermediaries
corporate sector / non-
financial corporations
non-financial
issue instruments to raise funds for their business requirements and trade instrument in the money market
corporation
foreign sector all that situated outside the jurisdiction of a certain country
non-profit organization exist to respond to specific causes like humanitarian aid, environment etc.