...Explain the main reasons why financial markets and financial intermediaries exist. Why are banks special? A bank is a financial intermediary that offers loans and deposits, and payment services. In the past decade the banks have become a very important part of the economy. Banks are financial intermediaries, financial intermediaries and financial markets main role is to provide a system by which funds are transferred and allocated to their most productive opportunities. Banks need money and they get the money from people who invest in the bank and people who save their money in the bank, but the money does not stay in the bank it has to be allocated to people or companies with deficit funds (borrowers). In doing so they increase the economic efficiency by promoting a better distribution of resources. How can the transfer of wealth from surplus units to deficit units occur? There are two ways that the transfer of wealth can happen its either direct finance or indirect finance. Direct finance is the transfer of funds from surplus units to deficit units via financial markets. Indirect finance on the other hand has a different procedure as the transfer of funds does not occur directly from lender to borrowers as the financial intermediaries step in. Why is there a need for financial markets and why do they exist? Financial Market exists in order to facilitate the relations between providers of capital such as savers and investors and users of capital such as companies and...
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...Explain the main reasons why financial markets and financial intermediaries exist. Why are banks special? A bank is a financial intermediary that offers loans and deposits, and payment services. In the past decade the banks have become a very important part of the economy. Banks are financial intermediaries, financial intermediaries and financial markets main role is to provide a system by which funds are transferred and allocated to their most productive opportunities. Banks need money and they get the money from people who invest in the bank and people who save their money in the bank, but the money does not stay in the bank it has to be allocated to people or companies with deficit funds (borrowers). In doing so they increase the economic efficiency by promoting a better distribution of resources. How can the transfer of wealth from surplus units to deficit units occur? There are two ways that the transfer of wealth can happen its either direct finance or indirect finance. Direct finance is the transfer of funds from surplus units to deficit units via financial markets. Indirect finance on the other hand has a different procedure as the transfer of funds does not occur directly from lender to borrowers as the financial intermediaries step in. Why is there a need for financial markets and why do they exist? Financial Market exists in order to facilitate the relations between providers of capital such as savers and investors and users of capital such as companies and...
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...The model represents the flow of money and products throughout the economy in a very simplified way. In this model we can see that there are five basic markets and how these markets are connected to each others. 1. Manufacturer Markets: In this model this market is connected to the three others markets. Firstly manufacturer goes to the resource market where they buy resources (raw materials, components, parts or labors) and turn into finished goods that meet a consumer's expectations or specifications. Then they provide that product to the consumer markets through the intermediary markets. Manufacturer Markets are also connected to the government markets through paying taxes or providing products to the government. 2. Resource Markets: Resource markets are directly connected to the manufacturer markets, government markets and consumers markets. A resource market is a market where a business can go and purchase resources to produce goods and services. Resource markets provide resources to the manufacturer and earn money from it. To understand the Resource market we can give an example: When we go to the store to buy a new phone, it does not just appear out of nowhere, nor does the company get to pocket all of that $500 we pay for it. Of course not, the phone requires a manufacturing process, and the company must pay for the inputs of the goods and services required to make the phone. Those goods and services required to make a finished product...
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...Without trust, financial markets cannot function efficiently. Trust and integrity depend to an important degree on the reputation of financial markets to generate reliable valuations of companies and business ventures. This perspective makes clear why the integrity of the gatekeepers of the public trust to vouch for accurate and reliable information about public companies is at the heart of the proper functioning of financial markets. And since the ‘garbage in, garbage out’ principle also prevails in financial markets, public trust in the functioning of financial markets has declined as a result of major financial reporting scandals involving Enron, Tyco, WorldCom, Parmalat and others. Also, massive overvaluations of equity that occurred in the second half of the 1990s and in the early 2000s have been singled out as being caused by misinformation and manipulation of financial results ( Jensen, 2002). More generally, when information about the operation of public companies is false, misleading or opaque, trust in financial markets is likely to be affected adversely. This gives financial market participants a stake in the disclosure of timely and meaningful information, including by assuring that the quality of financial reporting by public companies is as high as possible. And this in turn puts the spotlight on the role of the gatekeepers of the public trust, in particular accounting firms, banks, rating agencies, supervisors and regulators. This contribution...
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...It is often said that information is power in today’s economy, and this is aptly demonstrated by the emergence of many new types of information intermediaries in the last decade. The term infomediary is used for many such intermediaries, since their role is to capture, aggregate, and exploit information about participating parties in order to facilitate the efficient allocation of goods or services. Wise and Morrison (2000) note, in the context of business-to- business markets, that with the spread of digitization “value has shifted from the product itself to informa- tion about the product.” Intermediaries create value via information collection, aggregation, display, and information processing; by managing workflow for a set of transactions between a buyer and seller; by coordinating logistical services to buyers and sellers; or by providing information processing services for end-to-end transaction management. Such infomedi- aries are becoming commonplace in many business and consumer market settings, including in hotel and travel coordination (Dube and Renaghan 2000), retail marketing (Chen et al. 2002), and private online exchanges for B2B commerce (Hoffman et al. 2002). Bailey and Bakos (1997) discuss four services offered by intermediaries: (a) aggregation of buyer demand and seller products, (b) providing trust between participants, (c) market facilitation, and (d) matching buyers and sellers. Kaplan and Sawhney (2000) reinforce the notion that electronic intermedi-...
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...Financial Intermediaries and the Perfect Market Models When a banker starts to study the theory of financial intermediation in order to better understand what he has done during his professional life, he enters a world unknown to him. The world is full of concepts which he did not, or hardly, know before and full of expressions he never used himself: asymmetric information, adverse selection, monitoring, costly state verification, moral hazard and a couple more of the same kind. As it took shape in the last three decades, he gets the uneasy feeling that a growing divergence has emerged between the microeconomic theory of banking. The everyday behavior of bankers according to their business motives are expressed in the language they use. For this assignment, I want to reflect on the merits of the present theory of financial intermediation, on what it does and does not explain from both a practical and theoretical point of view. The theory is impressive by the multitude of applications in the financial world of agency theory and the theory of asymmetric information, of adverse selection and moral hazard. As well as by their relevance for important aspects of the financial intermediation process, as is shown in an ever-growing stream of economic studies. But the study of all these theories leaves the practitioner with the impression that they do not provide a satisfactory answer to the basic question; which forces really drive the financial intermediation process? The current...
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...Business This collection contains materials that inform, instruct, and support those who wish to develop or improve a set of writing skills that will have practical applications in the business environment. Included are annotated examples, online templates and step-by-step guides for writing common business documents such as letters, memos, email, and press releases. Category: Business Documents Hide Descriptions Writing Guides Business Letters: When you write business letters in industry or for a class, knowing your purpose and audience will help determine what information to include. Generally, business letters follow a particular format, although your instructor or company may require you to use alternative formats. This guide provides writers with an introduction to writing business letters. Case Studies: This guide examines case studies, a form of qualitative descriptive research that is used to look at individuals, a small group of participants, or a group as a whole. Researchers collect data about participants using participant and direct observations, interviews, protocols, tests, examinations of records, and collections of writing samples. Starting with a definition of the case study, the guide moves to a brief history of this research method. Using several well documented case studies, the guide then looks at applications and methods including data collection and analysis. A discussion of ways to handle validity, reliability, and generalizability follows, with...
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...between a financial asset and a tangible asset. A financial asset is an intangible asset whose value is derived from a contractual claim, such as bank deposits, bonds, and stocks. Financial assets are usually more liquid than other tangible assets, such as commodities or real estate, and may be traded on financial markets. In contrast, a tangible asset is an asset that has a physical form. Tangible assets include both fixed assets, such as machinery, buildings and land, and current assets, such as inventory. 3. Describe the two principle roles of financial assets. The principal economic function of financial assets are: (1) to transfer funds from persons who have surplus funds to those who need funds to invest in tangible assets( e.g. mortgage funds lending to homebuyers); (2) transfer funds in such a way as to redistribute the unavoidable risk associated with the cash flow generated by tangible assets among those seeking and those providing the funds (seekers of funds ask others to share the risks in their undertakings). 4. a. Explain the three factors that have led to the globalization of financial markets. Globalization has led to an expansion and integration of global financial markets. Prior to the 1980’s, the US financial market was the largest in the world but with the advent of new technologies and globalization, many markets have emerged and indeed the majority of them have been integrated to form a global financial hub. The growth of global financial markets...
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...Financial Intermediation and Credit Policy in Business Cycle Analysis∗ 1 Introduction To motivate interest in a paper on financial factors in business fluctuations it use to be necessary to appeal either to the Great Depression or to the experiences of many emerging market economies. This is no longer necessary. Over the past few years the United States and much of the industrialized world have experienced the worst financial crisis of the post-war. The global recession that has followed also appears to have been the most severe of this era. At the time of this writing there is evidence that the financial sector has stabilized and the real economy has stopped contracting and output growth has resumed. The path to full recovery, however, remains highly uncertain. The timing of recent events, though, poses a challenge for writing a Handbook chapter on credit market frictions and aggregate economic activity. It is true that over the last several decades there has been a robust literature in this area. Bernanke, Gertler and Gilchrist (BGG, 1999) surveyed much of the earlier work a decade ago in the Handbook of Macroeconomics. Since the time of that survey, the literature has continued to grow. While much of this work is relevant to the current situation, this literature obviously did not anticipate all the key empirical phenomena that have played out during the current crisis. A new literature that builds on the earlier work is rapidly cropping up to address...
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...Financial Systems How does the financial inter-mediation process can enhance the efficiency of financial system? (Give a comprehensive description considering the different components of the financial system & the relationship, each of these components having with financial inter-mediation) Financial system is a system with differences at several levels in firm’s level; it is system to track the financial activities of the company. In national level financial system is a system that enables lenders and borrowers to exchange funds and the global financial system is basically a broader regional system that encompasses all financial institutions, borrowers and lenders within the global economy. In a broader sense financial system operates the financial activities including financial intermediation. According to the central Bank of Sri Lanka; Financial System mainly consists of financial institutions, financial markets, financial instruments and financial infrastructure. Financial Intermediation simply identified as a process performed by an entity of taking in funds from a depositor and then lending them out to a borrower. This entity, in general called as a financial intermediary. It can be a commercial bank or other financial institutions such as investment banks, insurance companies, broker-dealers, mutual funds and pension funds. Financial intermediaries offer a number of benefits to the average consumer including safety, liquidity and economies of scale. The banking...
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...Chapter One Why Are Financial Intermediaries Special? Chapter Outline Introduction Financial Intermediaries’ Specialness Information Costs • Liquidity and Price Risk • Other Special Services Other Aspects of Specialness The Transmission of Monetary Policy Credit Allocation Intergenerational Wealth Transfers or Time Intermediation Payment Services Denomination Intermediation Specialness and Regulation Safety and Soundness Regulation Monetary Policy Regulation Credit Allocation Regulation Consumer Protection Regulation Investor Protection Regulation Entry Regulation The Changing Dynamics of Specialness • Trends in the United States • Future Trends • Global Issues Summary Solutions for End-of-Chapter Questions and Problems: Chapter One 1. Identify and briefly explain the five risks common to financial institutions. Default or credit risk of assets, interest rate risk caused by maturity mismatches between assets and liabilities, liability withdrawal or liquidity risk, underwriting risk, and operating cost risks. 2. Explain how economic transactions between household savers of funds and corporate users of funds would occur in a world without financial intermediaries (FIs). In a world without FIs the users of corporate funds in the economy would have to approach directly the household savers of funds...
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...and valuation using financial statements and learn the skills of financial analysis, he will get much more value than he expects. Firstly, if he knows the financial analysis, he can correctly appraise the financial position of the firm and cash flow situation, which will help him better understand the firm, this skill will also help him to reveal the risk that the firm may face in the future. And on the other hand, if he knows the financial analysis very well, he can interpret the financial date faster than others and takes action more quickly than others. These are very helpful and important for him. So John should take this course about business analysis and valuation using financial statements. Question 2 During twenty years, seven major financial crises have happened, it is terrible. We can know they had great influence on the large number of financial and information intermediaries working in financial markets, and the crises had caused irreversible economic loss to them. In my mind, the financial analysis can help us to evaluate the performance of a firm and it can also help us to forecast the development of the whole financial market by using the financial data. And the managers can also make some strategy changes according to these financial analysis dates, so that they can make the more correctly strategy, and I think these analysis and information will largely help us to avert the financial crisis. In my opinion, although the effective financial analysis can’t avoid...
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...CHAPTER 3: The Role of Financial Intermediaries and Financial Markets FOCUS OF THE CHAPTER This chapter provides an analysis of the roles and importance of financial institutions and financial markets, two important parts of the financial system. A broad classification of Canadian financial institutions is presented with an historical overview. Some basic classifications of financial markets are described. The chapter ends with an evaluation of the importance of the financial system to the Canadian economy, and of the future of banks, given recent developments in the financial system. Learning Objectives: □ Explain what financial intermediaries do □ Explain a classification of the financial system by type of institution □ Name the original four pillars of the financial system □ Provide a classification of the financial system by type of market □ Describe the financial system in Canada □ Discuss the effects of technology and deregulation on banks, and whether banks as we know them will survive SECTION SUMMARIES Intermediation A financial intermediary (such as a bank) simultaneously interacts with savers (or lenders) and borrowers and produces a set of services which facilitate the transformation of its liabilities (such as deposits) into assets (such as loans). The function of facilitating liabilities (or assets) into assets (or liabilities) is called intermediation. Through intermediation financial intermediaries allow indirect lending (and borrowing)...
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...2 The role of financial systems in the economy This section iscusses the main functions of financial intermeiaries an financial markets, an their comparative roles. Financial systems, i.e. financial intermeiaries an financial markets, channel funs from those who have savings to those who have more prouctive uses for them. They perform two main types of financial service that reuce the costs of moving funs between borrowers an leners, leaing to a more efficient allocation of resources an faster economic growth. These are the provision of liquiity an the transformation of the risk characteristics of assets.[2] 2.1 Provision of liquiity The link between liquiity an economic performance arises because many high return investment projects require long-term commitments of capital, but risk averse leners (savers) are generally unwilling to elegate control over their savings to borrowers (investors) for long perios. Financial systems mobilise savings by agglomerating an pooling funs from isparate sources an creating small enomination instruments. These instruments provie opportunities for iniviuals to hol iversifie portfolios. Without pooling iniviuals an househols woul have to buy an sell entire firms (Levine 1997). iamon an ybvig (1983) show how financial intermeiaries can enhance risk sharing, which can be a preconition of liquiity, an can thus improve welfare. In their moel, without an intermeiary (such as a bank), all investors are locke into illiqui long-term investments that...
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...Cross-Border Financial Flows from Intermediaries? The role played by financing in the process of development cannot be addressed as either enhancing or undermining, because it could function as both depending on the global dynamics and internal structural differences within countries in a specific period of time. As seen through history, financing has showed that the combination of political and historical factors influence the resulting situation whether it is development or not reflected on its economic growth, by designing a unique path that later will have implications on social issues not being address at first. Depending on the initial situation and a clear idea of the expected results from an entering cash flow to the economy could influence to be a beneficial transference. The purpose of this essay is to discuss the dilemma on whether cross-border cash flows into a financial system increases or decreases economic growth translated somehow in industrialization, mostly from under a economic point of view that takes into consideration the macroeconomic policies, taking this factors as components of development; knowing that there are other social, cultural and political issues that are part of this process that while are not being approached entirely in this essay as poverty and inequality, are indirectly implied as part of the process. First I briefly present the historic trend of political economy that has lead among different stages of the global financial system; second...
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