Top Banner
Moving Funds Through the Financial System
27

Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.

Dec 17, 2015

Download

Documents

Gilbert Evans
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Page 1: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.

Moving Funds Through the Financial System

Page 2: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.

Purpose of the Financial System

• Transfer funds from savers to borrowers.

• Savers are suppliers of funds, Borrowers are demanders of funds.

• Financial markets issue claims on borrowers.

• Financial intermediaries act as go-betweens.

Page 3: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.

Key Services Provided by the Financial System

• Risk sharing by allowing savers to hold many assets (through diversification)

• Providing liquidity, which is the ease with which an asset can be exchanged for money

• Providing information about borrowers and returns on financial assets

• Delegating monitoring activity

• Pooling Funds for Investment

Page 4: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.

An alternative to using the financial system for monitoring

Page 5: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.

Services Provided by the Financial System Diagram

Page 6: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.

Describing the Financial System

• Direct Financing and Indirect Financing

• Direct Financing: lenders lend directly to borrowers in a market

• Indirect financing: lenders lend to financial intermediaries who then lend to borrowers. (Financial Intermediaries: two broad types: bank and non-bank intermediaries (mutual funds, hedge funds etc.)

Page 7: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.

Financial Markets

• Primary markets are those in which newly issued claims are sold to initial buyers.

• Secondary markets are those in which previously issued claims are resold.

Page 8: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.

Direct Finance

• Primary markets: newly issued claims are sold to buyers from the borrower. This could be:

a. Debt (Requires borrower to pay principal (amount of loan)+ interest. Types?

b. Equity (Allows for variable payments to be made, and lender gets to own share of profits and assets of firm)

Which do you think accounts for larger amount of funds raised?

Page 9: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.

Beginning December 11, 2001 the Series EE savings bonds you buy will be inscribed with the special legend "Patriot Bond." These specially designated Series EE Patriot Bonds offer Americans one more way to express their support for our Nation's anti-terrorism efforts. Please follow the links below for more information about the Patriot Bond.

Example of Government issued debt

Page 10: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.
Page 11: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.

An innovator in the financial market as well.

Page 12: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.
Page 13: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.

Maturity

• Short-term debt maturity of less than a year

• Intermediate-term debt instruments of maturity of less than a year

• Long term debt >10 years

Page 14: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.

Google sets $2.7 billion IPO

Popular search engine company files for its eagerly anticipated initial public offering.April 30, 2004: 7:56 AM EDT By Paul R. La Monica, CNN/Money senior writer

NEW YORK (CNN/Money) - Google, the world's No. 1 Internet search engine, finally filed for its initial public stock offering Thursday and promised to maintain its long-term focus even though it will soon face the intense scrutiny of Wall Street

Page 15: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.

Primary Market

• Advantages and Disadvantages of: Debt

- Issuers of debt continue to own their assets and can pay fixed payments

- For lenders, there is the risk of default Equity- Issuers of Equity do not have a fixed

scheduled payment (expect to give dividends)- For lenders there is the risk of no returns

Page 16: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.

Describing Secondary Markets

• The Capital Market: where equity and debt whose maturity (length to payment) is greater than one year is traded

• The Money Market where debt whose maturity (length to payment) is less than one year is traded

Page 17: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.

Secondary Market

• Market where debt and equity from the primary market are bought and sold

• Why have it? Provides for diversification of portfolio, promotes liquidity, and gives information

• Auction and Over the Counter markets. Auction (prices are set by competitive bidding-e.g. stock exchange). OTC (prices are posted and can be bought at that price).

Page 18: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.

Types of Secondary Financial Markets

• Maturity: money and capital markets

• Trading places: auction and over-the-counter markets

• Settlement: cash or derivative

Page 19: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.

Important Financial Instruments

• Money market instruments- Treasury Bills, Commercial Paper, Banker’s acceptances, Repurchase agreements, Federal Funds, Eurodollars, CD

• Capital Market Instruments- Treasury securities, Government agency securities, Municipal Bonds, Stocks, Corporate Bonds, Mortgages, Commercial Bank Loans

Page 20: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.

Flow of Funds is a good source of data

• The US produces a flow of funds table which provides some useful information about where funds and liquidity are flowing.

• This is available on class website

.

Page 21: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.

Goals of Financial Regulation

• Provision of information

• Maintenance of financial stability

• Controlling the money supply

• Encouraging particular activities

Page 22: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.
Page 23: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.

Changes in Financial Integration and globalization

• Financial Integration is on the rise

• Much innovation

• Higher globalization

Page 24: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.

• Financial structure: bank-based vs. stock

market-based

– Three questions about the relationships between financial intermediation and real economic activity:• (1) Does FS affect economic activity?

Evidence: Yes

• (2) Direction of causality: FS leads econ activity or vice versa? Evidence: both

• (3) Does the structure of the FS matter?

Page 25: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.

• Role of banks in promoting investment

– Pooling savings (under the view that savings cause investment)

– Reducing liquidity risk (maturity transformation)

– Information about investment opportunities (economies of scale in information gathering/processing)

– Delegated monitoring

– Customized financial products financial and technological innovation

• Criticism of bank-based systems: – Rent extraction (from information)

– Close bank-firm ties preclude competition

Page 26: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.

• Role of stock markets (for investment)– Information about profitability of investment

– Reduce the cost of capital: importance of SM liquidity, not just size

– Pressure on management: takeovers (effective or threat)

• Criticism of SM-based systems– Economic content of SM signals (do prices reflect

fundamentals – see later, chap 10)

– Takeovers: do not necessarily increase efficiency; hostile takeovers (costly); promoting short-termism in management

Page 27: Moving Funds Through the Financial System. Purpose of the Financial System Transfer funds from savers to borrowers. Savers are suppliers of funds, Borrowers.

• Banks vs. SM: where does research stand?– Complementarity of banks and SM

– More productive research avenues: • Financial services view (both banks and SM)

• Law and finance view: creditor and investor rights; quality of the legal system