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CH 1 Financial Markets

Terms in this set (19)

Commercial Banks
depository institutions where major assets are loans and whose major liabilities are deposits.Liabilities include more non deposit sources of funds, such as subordinate notes and debentures, than do those of other depository institutions.
Insurance Companies
financial institutions that protect individuals and corporations from adverse events.
Financial Institutions
perform the essential function of channeling funds from those with surplus funds to those with shortages of funds
Direct Transfer
A corporation sells its stock directly to investors without going through a financial institution.
Investment Banks and Securities Firms
Financial Institutions that help firms issue securities and engage in related activities such as security brokerage and securities trading.
Investment Funds
financial institutions that pool financial resources of individuals and companies and invest those resources in diversified portfolios of assets.
Thrifts
depository institutions in the form of savings associations, savings banks and credit unions. Perform services similar to commercial banks, but they tend to concentrate their loans in one segment, such as real estate loans or consumer loans. (Savings and Loans association)
finance companies
financial intermediaries that make loans to both individuals and businesses. Unlike depository institutions, they do not accept deposits but instead rely on short- and long-term debt for funding.
Pension funds
Financial institutions that offer savings plans through which fund participants accumulate savings during their working years before withdrawing them during their retirement years.
Reasons why funds would not flow as freely in a world without Financial Institutions
1. The need to monitor
2. The need for liquidity
3. Bear Price risk (risk that asset sale price will be lower than original purchase price)
Bottom Line: The average person would just hold cash rather than lend it out
How do FI's benefit suppliers of funds?
1.Reduce monitoring costs
2.Reduce liquidity/Price risk (financial claims)
3.Maturity intermediation (bridge gap between short and long term)
4.Transaction cost services
5.Denomination Intermediation (allow access to high-priced assets, ETF's)
How do FIs benefit the overall economy?
1. Money supply transmission (monetary policy actions impact)
2.Credit allocation(major source of financing for a particular sector of the economy, farming and real estate)
3.Intergenerational wealth transfer (college savings)
4.Payment services (direct deposit)
Trends in the U.S
1. Shift in assets from commercial banks and thrifts to investment companies (mutual funds) and securities firms
2. Rise of financial services holding companies, began with Citi-travelers merger in 1999
Why are FI's highly regulated?
1. Failure to provide their services (ex. bank failures may destroy household savings and at the same time restart a firm's access to credit)
2. Individual Financial Institutions can lead to a panic (regulated to prevent these types of market failures)
Largest banks in the U.S vs the rest of the world
U.S- JPMorgan Chase and Bank of America are ranked 1st and 2nd
World- JPMorgan Chase, BOA are ranked 7th and 9th
Which factors affect growth in foreign financial markets?
1. Financial markets and institutions in foreign countries
2. International Investors have turned to the US to expand investment opportunities and improve portfolio risk and return characteristics
3.Info on foreign investments and markets is now more accessible (since 1990's)
4. Some US F.I's offer customers opportunities to invest in foreign securities at relatively low transaction costs
5. While the EURO has had significant effect throughout Europe, it is also having a notable impact on the global financial system
6. Economic growth in Pacific Basin countries, China, and other emerging countries
7. Deregulation in many foreign countries has allowed international investors greater access and allowed the deregulating countries to expand their investor bases
Primary Markets
markets in which corporations raise capital by issuing new securities. Funds flow from investors to companies.
Secondary Markets
markets in which funds flow from investor to investor.
How do investors benefit from secondary markets?
1. Liquidity- provide investors the opportunity to trade securities at their market value quickly
2. Asset Allocation- provide investors the opportunity to purchase securities with varying risk-return characteristics
3. Market Value- Give corporations the information about the current market value of their instruments
This allows companies to
1. Executive Pay
2.Currency for acquisitions
3.Evaluate Performance
4.Issue additional shares
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