金融市場英文教學(xué)課件：ch2 Overview of the Financial System

1、Chapter 2Overview of the Financial SystemCopyright 2009 Pearson Prentice Hall. All rights reserved.2-2Chapter PreviewSuppose you want to start a business manufacturing a household cleaning robot, but you have no funds.At the same time, Walter has money he wishes to invest for his retirement.If the t

2、wo of you could get together, perhaps both of your needs can be met. But how does that happen?Copyright 2009 Pearson Prentice Hall. All rights reserved.2-3Chapter PreviewAs simple as this example is, it highlights the importance of financial markets and financial intermediaries in our economy.We nee

3、d to acquire an understanding of their general structure and operation before we can appreciate their role in our economy.Copyright 2009 Pearson Prentice Hall. All rights reserved.2-4Chapter PreviewIn this chapter, we examine the role of the financial system in an advanced economy. We study the effe

4、cts of financial markets and institutions on the economy, and look at their general structure and operations. Topics include:Function of Financial MarketsStructure of Financial MarketsInternationalization of Financial MarketsFunction of Financial IntermediariesFinancial IntermediariesRegulation of t

5、he Financial SystemCopyright 2009 Pearson Prentice Hall. All rights reserved.2-5Function of Financial Markets Channels funds from person or business without investment opportunities (i.e., “Lender-Savers”) to one who has them (i.e., “Borrower-Spenders”) Improves economic efficiencyCopyright 2009 Pea

6、rson Prentice Hall. All rights reserved.2-6Financial Markets Funds TransfereesLender-SaversHouseholdsBusiness firmsGovernmentForeignersBorrower-SpendersBusiness firmsGovernmentHouseholdsForeignersCopyright 2009 Pearson Prentice Hall. All rights reserved.2-7Segments of Financial MarketsDirect Finance

7、Borrowers borrow directly from lenders in financial markets by selling financial instruments which are claims on the borrowers future income or assetsIndirect FinanceBorrowers borrow indirectly from lenders via financial intermediaries (established to source both loanable funds and loan opportunitie

8、s) by issuing financial instruments which are claims on the borrowers future income or assetsCopyright 2009 Pearson Prentice Hall. All rights reserved.2-8Function of Financial Markets Copyright 2009 Pearson Prentice Hall. All rights reserved.2-9Importance of Financial MarketsThis is important. For e

9、xample, if you save $1,000, but there are no financial markets, then you can earn no return on this might as well put the money under your mattress.However, if a carpenter could use that money to buy a new saw (increasing her productivity), then shed be willing to pay you some interest for the use o

10、f the funds.Copyright 2009 Pearson Prentice Hall. All rights reserved.2-10Importance of Financial MarketsFinancial markets are critical for producing an efficient allocation of capital, allowing funds to move from people who lack productive investment opportunities to people who have them.Financial

11、markets also improve the well-being of consumers, allowing them to time their purchases better.Copyright 2009 Pearson Prentice Hall. All rights reserved.2-11Structure of Financial MarketsIt helps to define financial markets along a variety of dimensions Copyright 2009 Pearson Prentice Hall. All righ

12、ts reserved.2-12Structure of Financial MarketsDebt MarketsShort-Term (maturity 10 year)Intermediate term (maturity in-between)Represented $41 trillion at the end of 2007.Equity MarketsPay dividends, in theory foreverRepresents an ownership claim in the firm/residual claimantTotal value of all U.S. e

13、quity was $18 trillion at the end of 2005.Copyright 2009 Pearson Prentice Hall. All rights reserved.2-13Structure of Financial MarketsPrimary MarketNew security issues sold to initial buyersTypically involves an investment bank who underwrites the offeringSecondary MarketSecurities previously issued

14、 are bought and soldExamples include the NYSE and NasdaqInvolves both brokers and dealers (do you know the difference?)Copyright 2009 Pearson Prentice Hall. All rights reserved.2-14Structure of Financial MarketsEven though firms dont get any money, per se, from the secondary market, it serves two im

15、portant functions:Provide liquidity, making it easy to buy and sell the securities of the companiesEstablish a price for the securitiesCopyright 2009 Pearson Prentice Hall. All rights reserved.2-15Structure of Financial MarketsWe can further classify secondary markets as follows:ExchangesTrades cond

16、ucted in central locations (e.g., New York Stock Exchange, CBT) Over-the-Counter MarketsDealers at different locations buy and sellBest example is the market for Treasury securitiesNYSE home pageCopyright 2009 Pearson Prentice Hall. All rights reserved.2-16Classifications of Financial MarketsWe can

17、also further classify markets by the maturity of the securities:Money Market: Short-Term (maturity 1 year) plus equitiesCopyright 2009 Pearson Prentice Hall. All rights reserved.2-17Internationalization of Financial MarketsThe internationalization of markets is an important trend. The U.S. no longer

18、 dominates the world stage.International Bond MarketForeign bondsDenominated in a foreign currencyTargeted at a foreign marketEurobondsDenominated in one currency, but sold in a different marketnow larger than U.S. corporate bond marketOver 80% of new bonds are Eurobonds.Copyright 2009 Pearson Prent

19、ice Hall. All rights reserved.2-18Internationalization of Financial MarketsEurocurrency MarketForeign currency deposited outside of home countryEurodollars are U.S. dollars deposited, say, London.Gives U.S. borrows an alternative source for dollars.World Stock MarketsU.S. stock markets are no longer

20、 always the largestat one point, Japans was largerCopyright 2009 Pearson Prentice Hall. All rights reserved.2-19Internationalization of Financial MarketsAs the next slide shows, the number of international stock market indexes is quite large. For many of us, the level of the Dow or the S&P 500 is kn

21、own. How about the Nikkei 225? Or the FTSE 100? Do you know what countries these represent?Internationalization of Financial MarketsCopyright 2009 Pearson Prentice Hall. All rights reserved.2-21Global perspectiveRelative Decline of U.S. Capital MarketsThe U.S. has lost its dominance in many industri

22、es: auto and consumer electronics to name a few.A similar trend appears at work for U.S. financial markets, as London and Hong Kong compete. Indeed, many U.S. firms use these markets over the U.S.Function of FinancialIntermediaries: Indirect FinanceWe now turn our attention to the top part of Figure

23、 2.1 indirect finance.Copyright 2009 Pearson Prentice Hall. All rights reserved.2-23Function of FinancialIntermediaries : Indirect FinanceInstead of savers lending/investing directly with borrowers, a financial intermediary (such as a bank) plays as the middleman:the intermediary obtains funds from

24、saversthe intermediary then makes loans/investments with borrowersCopyright 2009 Pearson Prentice Hall. All rights reserved.2-24Function of FinancialIntermediaries : Indirect FinanceThis process, called financial intermediation, is actually the primary means of moving funds from lenders to borrowers

25、.More important source of finance than securities markets (such as stocks)-why?Needed because of transactions costs, risk sharing, and asymmetric information Copyright 2009 Pearson Prentice Hall. All rights reserved.2-25Function of FinancialIntermediaries : Indirect FinanceTransactions Costs An exam

26、pleFinancial intermediaries make profits by reducing transactions costs Reduce transactions costs by developing expertise and taking advantage of economies of scale-An exampleCopyright 2009 Pearson Prentice Hall. All rights reserved.2-26Function of FinancialIntermediaries : Indirect FinanceA financi

27、al intermediarys low transaction costs mean that it can provide its customers with liquidity services, services that make it easier for customers to conduct transactions Banks provide depositors with checking accounts that enable them to pay their bills easilyDepositors can earn interest on checking

28、 and savings accounts and yet still convert them into goods and services whenever necessaryCopyright 2009 Pearson Prentice Hall. All rights reserved.2-27Global PerspectiveStudies show that firms in the U.S., Canada, the U.K., and other developed nations usually obtain funds from financial intermedia

29、ries, not directly from capital markets.In Germany and Japan, financing from financial intermediaries exceeds capital market financing 10-fold.However, the relative use of bonds versus equity does differ by country.Copyright 2009 Pearson Prentice Hall. All rights reserved.2-28Function of FinancialIn

30、termediaries : Indirect FinanceAnother benefit made possible by the FIs low transaction costs is that they can help reduce the exposure of investors to risk, through a process known as risk sharingFIs create and sell assets with lesser risk to one party in order to buy assets with greater risk from

31、another partyThis process is referred to as asset transformation, because in a sense risky assets are turned into safer assets for investorsCopyright 2009 Pearson Prentice Hall. All rights reserved.2-29Function of FinancialIntermediaries : Indirect FinanceFinancial intermediaries also help by provid

32、ing the means for individuals and businesses to diversify their asset holdings.Copyright 2009 Pearson Prentice Hall. All rights reserved.2-30Function of FinancialIntermediaries : Indirect FinanceAnother reason FIs exist is to reduce the impact of asymmetric information.An exampleOne party lacks cruc

33、ial information about another party, impacting decision-making. We usually discuss this problem along two fronts: adverse selection and moral hazardCopyright 2009 Pearson Prentice Hall. All rights reserved.2-31Function of FinancialIntermediaries : Indirect FinanceAdverse SelectionAn exampleBefore tr

34、ansaction occursPotential borrowers most likely to produce adverse outcome are ones most likely to seek a loanSimilar problems occur with insurance where unhealthy people want their known medical problems coveredCopyright 2009 Pearson Prentice Hall. All rights reserved.2-32Asymmetric Information: Ad

35、verse Selection and Moral HazardMoral HazardAn exampleAfter transaction occursHazard that borrower has incentives to engage in undesirable (immoral) activities making it more likely that wont pay loan backAgain, with insurance, people may engage in risky activities only after being insuredAnother vi

36、ew is a conflict of interestCopyright 2009 Pearson Prentice Hall. All rights reserved.2-33Asymmetric Information: Adverse Selection and Moral HazardFinancial intermediaries reduce adverse selection and moral hazard problems, enabling them to make profits. How they do this is the covered in many of t

37、he chapters to come.Copyright 2009 Pearson Prentice Hall. All rights reserved.2-34Types of Financial IntermediariesCopyright 2009 Pearson Prentice Hall. All rights reserved.2-35Types of Financial IntermediariesCopyright 2009 Pearson Prentice Hall. All rights reserved.2-36Types of Financial Intermedi

38、ariesDepository Institutions (Banks): accept deposits and make loans. These include commercial banks and thrifts.Commercial banks (7,500 currently)Raise funds primarily by issuing checkable, savings, and time deposits which are used to make commercial, consumer and mortgage loansCollectively, these

39、banks comprise the largest financial intermediary and have the most diversified asset portfoliosCopyright 2009 Pearson Prentice Hall. All rights reserved.2-37Types of Financial IntermediariesThrifts: S&Ls, Mutual Savings Banks (1,500) and Credit Unions (8,900)Raise funds primarily by issuing savings

40、, time, and checkable deposits which are most often used to make mortgage and consumer loans, with commercial loans also becoming more prevalent at S&Ls and Mutual Savings BanksMutual savings banks and credit unions issue deposits as shares and are owned collectively by their depositors, most of whi

41、ch at credit unions belong to a particular group, e.g., a companys workersCopyright 2009 Pearson Prentice Hall. All rights reserved.2-38Contractual Savings Institutions (CSIs)All CSIs acquire funds from clients at periodic intervals on a contractual basis and have fairly predictable future payout re

42、quirements.Life Insurance Companies receive funds from policy premiums, can invest in less liquid corporate securities and mortgages, since actual benefit pay outs are close to those predicted by actuarial analysisFire and Casualty Insurance Companies receive funds from policy premiums, must invest

43、most in liquid government and corporate securities, since loss events are harder to predictCopyright 2009 Pearson Prentice Hall. All rights reserved.2-39Contractual Savings Institutions (CSIs)All CSIs acquire funds from clients at periodic intervals on a contractual basis and have fairly predictable

44、 future payout requirements.Pension and Government Retirement Funds hosted by corporations and state and local governments acquire funds through employee and employer payroll contributions, invest in corporate securities, and provide retirement income via annuitiesCopyright 2009 Pearson Prentice Hal

45、l. All rights reserved.2-40Types of Financial IntermediariesInvestment intermediariesFinance Companies sell commercial paper (a short-term debt instrument) and issue bonds and stocks to raise funds to lend to consumers to buy durable goods, and to small businesses for operationsMutual Funds acquire

46、funds by selling shares to individual investors (many of whose shares are held in retirement accounts) and use the proceeds to purchase large, diversified portfolios of stocks and bondsCopyright 2009 Pearson Prentice Hall. All rights reserved.2-41Types of Financial IntermediariesMoney Market Mutual

47、Funds acquire funds by selling checkable deposit-like shares to individual investors and use the proceeds to purchase highly liquid and safe short-term money market instruments.p29Investment Banks advise companies on securities to issue, underwriting security offerings, offer M&A assistance, and act

48、 as dealers in security markets.Copyright 2009 Pearson Prentice Hall. All rights reserved.2-42Regulatory AgenciesCopyright 2009 Pearson Prentice Hall. All rights reserved.2-43Regulation of Financial MarketsMain Reasons for RegulationIncrease Information to InvestorsEnsure the Soundness of Financial

49、IntermediariesCopyright 2009 Pearson Prentice Hall. All rights reserved.2-44SEC home pageRegulation Reason: Increase Investor InformationAsymmetric information in financial markets means that investors may be subject to adverse selection and moral hazard problems that may hinder the efficient operat

50、ion of financial markets and may also keep investors away from financial marketsThe Securities and Exchange Commission (SEC) requires corporations issuing securities to disclose certain information about their sales, assets, and earnings to the public and restricts trading by the largest stockholder

51、s (known as insiders) in the corporationCopyright 2009 Pearson Prentice Hall. All rights reserved.2-45SEC home pageRegulation Reason: Increase Investor InformationSuch government regulation can reduce adverse selection and moral hazard problems in financial markets and increase their efficiency by i

52、ncreasing the amount of information available to investors. Indeed, the SEC has been particularly active recently in pursuing illegal insider trading.Copyright 2009 Pearson Prentice Hall. All rights reserved.2-46Regulation Reason: Ensure Soundness of Financial IntermediariesProviders of funds to fin

53、ancial intermediaries may not be able to assess whether the institutions holding their funds are sound or not.If they have doubts about the overall health of financial intermediaries, they may want to pull their funds out of both sound and unsound institutions, with the possible outcome of a financi

54、al panic.Such panics produces large losses for the public and causes serious damage to the economy.Copyright 2009 Pearson Prentice Hall. All rights reserved.2-47Regulation Reason: Ensure Soundness of Financial Intermediaries (cont.)To protect the public and the economy from financial panics, the gov

55、ernment has implemented six types of regulations:Restrictions on EntryDisclosureRestrictions on Assets and ActivitiesDeposit InsuranceLimits on CompetitionRestrictions on Interest RatesCopyright 2009 Pearson Prentice Hall. All rights reserved.2-48Regulation: Restriction on EntryRestrictions on Entry

56、Regulators have created very tight regulations as to who is allowed to set up a financial intermediaryIndividuals or groups that want to establish a financial intermediary, such as a bank or an insurance company, must obtain a charter from the state or the federal governmentOnly if they are upstandi

57、ng citizens with impeccable credentials and a large amount of initial funds will they be given a charter.Copyright 2009 Pearson Prentice Hall. All rights reserved.2-49Regulation: DisclosureDisclosure RequirementsThere are stringent reporting requirements for financial intermediariesTheir bookkeeping

58、 must follow certain strict principles,Their books are subject to periodic inspection,They must make certain information available to the public.Copyright 2009 Pearson Prentice Hall. All rights reserved.2-50Regulation: Restriction on Assets and ActivitiesThere are restrictions on what financial inte

59、rmediaries are allowed to do and what assets they can holdBefore you put your funds into a bank or some other such institution, you would want to know that your funds are safe and that the bank or other financial intermediary will be able to meet its obligations to youCopyright 2009 Pearson Prentice

60、 Hall. All rights reserved.2-51Regulation: Restriction on Assets and ActivitiesOne way of doing this is to restrict the financial intermediary from engaging in certain risky activitiesAnother way is to restrict financial intermediaries from holding certain risky assets, or at least from holding a gr