Chapter Eleven. Chapter 11 The Economics of Financial Intermediation Why do Financial Intermediaries Exist
|
|
- Barnard Carson
- 6 years ago
- Views:
Transcription
1 Chapter Eleven Chapter 11 The Economics of Financial Intermediation Why do Financial Intermediaries Exist Countries With Developed Financial Systems Prosper Basic Facts of Financial Structure 1. Direct Finance (issuing marketable debt and equity securities) is not the primary way in which businesses finance their operations 2. Indirect finance (using financial intermediaries) is much more important than direct finance, in which businesses raise funds directly from lenders in financial markets 1
2 Sources of Business Finance Basic Facts of Financial Structure 3. Financial intermediaries, particularly banks, are the most important source of external funds used to finance businesses. Basic Facts of Financial Structure 4. The financial system is among the most heavily regulated sectors of economy. 5. Only large, well-established corporations have easy access to securities markets (direct finance) to finance their activities. 2
3 Basic Facts of Financial Structure 6. Collateral is a prevalent feature of debt contracts for both households and businesses. 7. Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrowers. Why Financial Intermediaries are Important Direct Finance is expensive. Lending and borrowing involves two types of costs: transactions costs and information costs. Financial institutions exist to reduce these costs. Transactions Cost Loans contracts are expensive. Financial intermediaries specialize in making loans and writing contracts. Take advantage of economies of scale. written and used over and over again - reducing cost. Why Financial Intermediaries are Important Information Costs symmetric information - the case where all parties to a transaction or contract have the same information symmetric information. In many situations, this is not the case. Information is not the same. We refer to this imbalance in information as asymmetric information. 3
4 Information Asymmetries and Information Costs Asymmetric information imbalance of information. Two types of asymmetric information: 1. Adverse selection arises before the transaction occurs. Lenders need to know how to distinguish good credit risks from bad. 2. Moral hazard occurs after the transaction. Will borrowers use the money as they claim? Classic Example of Adverse Selection Lemons Problem Used cars and the market for lemons: Suppose good cars worth $15,000 and bad cars worth $5,000 Used car buyers can t tell good cars from bad. Buyers will at most pay the expected value of good and bad cars say $10,000. Sellers know if they have a good car, so they won t accept less than the true value. If buyers are only willing to pay average value, good car sellers will withdraw cars from the market. Then the market has only the bad cars (adverse selection). Classic Example of Adverse Selection Lemons Problem Companies have been created to solve the asymmetric information problem fill the information gap in the used car market. Consumer Reports publishes information on particular models CARFAX provides potential buyers with detailed history on any car. You can also hire a mechanic to look over a car for you before you buy it. Many car manufacturers offer certified used cars, which usually come with warranties. CarMax in an intermediary 4
5 Adverse Selection in Financial Markets Bonds If lender can t tell whether a borrowers is a good or bad credit, the lender will demand a risk premium to compensate for average risk. Borrowers with good credit will not want to borrow at the elevated interest rate. They leave the market. Only bad credit remains in the market. Lenders will not buy these bonds, the market disappears Adverse Selection in Financial Markets From a social perspective, the adverse selection problem is not good. Some companies will pass up good investments. Economy will not grow as rapidly as it could. Must fill the information gap and find ways for investors and lenders to distinguish well-run firms from poorly run firms. Solving the Adverse Selection Problem Disclosure of information Public companies that issue stock and bonds that are bought and sold in pubic financial markets are required to disclose large amounts of information. SEC registration, prospectus, annual and quarterly reports 5
6 Disclosure of Information Private collection and sale of information to investors. Research services like Moody s, Value Line, and Dun and Bradstreet collect information directly from firms and produce evaluations. But, private information services face a freerider problem. A free-rider is someone who doesn t pay the cost to get the benefit of a good or service. Banks, however, collect private information and keep it private. Collateral and Net Worth Another solution for adverse selection is to make sure lenders are protected/compensated if borrowers default. Collateral is something of value pledged by a borrower to the lender in the event of the borrower s default. It is said to back or secure a loan. Ex: Cars, houses Moral Hazard: Problem and Solutions The phrase moral hazard originated when economists studying insurance noted that an insurance policy changes the behavior of the person who is insured. Auto insurance Fire insurance Employment arrangement Moral hazard arises when we cannot observe people s actions and therefore cannot judge whether a poor outcome was intentional or just a result of bad luck. 6
7 Moral Hazard: Problem and Solutions In finance, the borrower knows more than the lender about the way borrowed funds will be used and the effort that will go into a project. or, the borrower may go to Tahiti. Moral Hazard in Debt Finance Because debt contracts allow owners to keep all the profits in excess of the loan payments, they encourage risk taking on the part of owners. People with risky projects are attracted to debt finance because they get the full benefit of the upside, while the downside is limited to their collateral. Lenders need to find ways to make sure borrowers don t take too many risks. Solving the Moral Hazard Problem in Debt Finance Bonds and loans have restrictive covenants that limit the amount of risk a borrower can assume. Require borrowers to maintain a certain level of net worth, a minimum credit rating, or a minimum bank balance. For example: home mortgages require home insurance, fire insurance, etc. 7
8 Lesson from the Financial Crisis Information Asymmetry and Securitization A key cause of the financial crisis of was insufficient screening and monitoring in the securitization of mortgages. Loan Originators eased standards and reduced screening to increase the volume of loans and short-term profitability. They worked for a fee. No skin in the game. The firms that assembled the mortgages for sale, the distributors, could have required originators to demonstrate a high level of net worth. They worked for a fee. No skin in the game. Banks and Information Costs Much of the information that banks collect is used to: Reduce information costs, and minimize the effects of adverse selection and moral hazard. And, they keep it private (no free rider) To do this, banks establish processes: Screen loan applicants, Monitor borrowers, and Penalize borrowers by enforcing contracts. Role of Financial Intermediaries In their role as financial intermediaries, financial institutions perform five functions: 1. Collecting and processing information in ways that reduce information costs. 2. Pooling the resources of small savers, 3. Providing safekeeping and accounting services, as well as access to payments system, 4. Supplying liquidity by converting savers balances directly into a means of payment whenever needed, 5. Providing ways to diversify risk, and 8
9 Pooling Savings A straightforward economic function of a financial intermediary is to pool the resources of many small savers. By accepting many small deposits, banks are able to make large loans. In order to do this, the intermediary: Must attract substantial numbers of savers, and Must convince potential depositors of the institution s soundness. Safekeeping, Payments System Access, and Accounting Banks: Are a place for safekeeping. Provide access to the payments system the network that transfers funds from the account of one person or business to the account of another. Provide Liquidity Liquidity is a measure of the ease and cost with which an asset can be turned into a means of payment. Financial intermediaries offer us the ability to transform assets into money at relatively low cost - ATM s, for example. 9
10 Diversify Risk Financial institutions enable us to diversify our investments and reduce risk. Banks take deposits from thousands of individuals and make thousands of loans with them. Each depositor has a very small stake in each one of the loans. Financial intermediaries provide a low-cost way for individuals to diversify their investments. 10
The Financial System. Instructor: Prof. Menzie Chinn UW Madison
Economics 435 The Financial System (3/4/13) Instructor: Prof. Menzie Chinn UW Madison Spring 2013 Introduction Financial institutions serve as intermediaries between savers and borrowers, so their assets
More informationAsymmetric Information and the Role of Financial intermediaries
Asymmetric Information and the Role of Financial intermediaries 1 Observations 1. Issuing debt and equity securities (direct finance) is not the primary source for external financing for businesses. 2.
More informationBanking, Liquidity Transformation, and Bank Runs
Banking, Liquidity Transformation, and Bank Runs ECON 30020: Intermediate Macroeconomics Prof. Eric Sims University of Notre Dame Spring 2018 1 / 30 Readings GLS Ch. 28 GLS Ch. 30 (don t worry about model
More informationInformational Frictions and Financial Intermediation. Prof. Irina A. Telyukova UBC Economics 345 Fall 2008
Informational Frictions and Financial Intermediation Prof. Irina A. Telyukova UBC Economics 345 Fall 2008 Agenda We are beginning to study banking and banking regulation. Banks are a financial intermediaries.
More informationStocks and corporate bonds not the most important sources of funds for business
Stocks and corporate bonds not the most important sources of funds for business Stocks and corporate bonds not the most important sources of funds for business Indirect finance through financial intermediaries
More informationCh. 2 AN OVERVIEW OF THE FINANCIAL SYSTEM
Ch. 2 AN OVERVIEW OF THE FINANCIAL SYSTEM To "finance" something means to pay for it. Since money (or credit) is the means of payment, "financial" basically means "pertaining to money or credit." Financial
More information8.1 Basic Facts About Financial Structure Throughout the World
Economics of Money, Banking, and Fin. Markets, 10e (Mishkin) Chapter 8 An Economic Analysis of Financial Structure 8.1 Basic Facts About Financial Structure Throughout the World 1) American businesses
More informationThe Financial System. Sherif Khalifa. Sherif Khalifa () The Financial System 1 / 52
The Financial System Sherif Khalifa Sherif Khalifa () The Financial System 1 / 52 Financial System Definition The financial system consists of those institutions in the economy that matches saving with
More informationPART THREE FUNDAMENTALS OF FINANCIAL INSTITUTIONS. Copyright 2012 Pearson Prentice Hall. All rights reserved.
PART THREE FUNDAMENTALS OF FINANCIAL INSTITUTIONS Copyright 2012 Pearson Prentice Hall. All rights reserved. CHAPTER 7 Why Do Financial Institutions Exist? Copyright 2012 Pearson Prentice Hall. All rights
More informationEconomics 330 Money and Banking Lecture 8 and 9. Prof. Menzie Chinn TAs: Chikako Baba, Deokwoo Nam
Economics 330 Money and Banking Lecture 8 and 9 Prof. Menzie Chinn TAs: Chikako Baba, Deokwoo Nam Chapter 8 An Economic Analysis of Financial Structure Eight Basic Facts 1. Stocks are not the most important
More informationChapter 8 An Economic Analysis of Financial Structure
Chapter 8 An Economic Analysis of Financial Structure Multiple Choice 1) American businesses get their external funds primarily from (a) bank loans. (b) bonds and commercial paper issues. (c) stock issues.
More informationBBM2153 Financial Markets and Institutions Prepared by Dr Khairul Anuar
BBM2153 Financial Markets and Institutions Prepared by Dr Khairul Anuar L3: Why Do Financial Institutions Exist? www. notes638.wordpress.com Copyright 2015 Pearson Education, Ltd. All rights reserved.
More informationFinancial Markets and Institutions, 8e (Mishkin) Chapter 2 Overview of the Financial System. 2.1 Multiple Choice
Financial Markets and Institutions, 8e (Mishkin) Chapter 2 Overview of the Financial System 2.1 Multiple Choice 1) Every financial market performs the following function: A) It determines the level of
More informationThe Financial System. Sherif Khalifa. Sherif Khalifa () The Financial System 1 / 55
The Financial System Sherif Khalifa Sherif Khalifa () The Financial System 1 / 55 The financial system consists of those institutions in the economy that matches saving with investment. The financial system
More informationEconomics 311: Money and Banking Midterm #2
Student ID #: Economics 311: Money and Banking Midterm #2 Please answer the following questions to the best of your ability. Remember, this exam is intended to be closed books, notes, and neighbors. No
More informationPindyck and Rubinfeld, Chapter 17 Sections 17.1 and 17.2 Asymmetric information can cause a competitive equilibrium allocation to be inefficient.
Pindyck and Rubinfeld, Chapter 17 Sections 17.1 and 17.2 Asymmetric information can cause a competitive equilibrium allocation to be inefficient. A market has asymmetric information when some agents know
More informationEconomics of Money, Banking, and Financial Markets, 11e (Mishkin) Chapter 2 An Overview of the Financial System. 2.1 Function of Financial Markets
Economics of Money, Banking, and Financial Markets, 11e (Mishkin) Chapter 2 An Overview of the Financial System 2.1 Function of Financial Markets 1) Every financial market has the following characteristic.
More informationChapter 8. An Economic Analysis of Financial Structure. 8.1 Basic Facts About Financial Structure Throughout the World
Chapter 8 An Economic Analysis of Financial Structure 8.1 Basic Facts About Financial Structure Throughout the World 1) American businesses get their external funds primarily from A) bank loans. B) bonds
More informationBBK3253 Risk Management Prepared by Dr Khairul Anuar
BBK3253 Risk Management Prepared by Dr Khairul Anuar L6 - Managing Credit Risk 23-0 Content 1. Credit risk definition 2. Credit risk in the banking sector 3. Credit Risk vs. Market Risk 4. Credit Products
More informationFinancial Markets and Institutions, 9e (Mishkin) Chapter 2 Overview of the Financial System. 2.1 Multiple Choice
Financial Markets and Institutions, 9e (Mishkin) Chapter 2 Overview of the Financial System 2.1 Multiple Choice 1) Every financial market performs the following function: A) It determines the level of
More informationChapter 2. Overview of the Financial System. Chapter Preview
Chapter 2 Overview of the Financial System Chapter Preview Suppose 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
More informationCHAPTER 09 (Part B) Banking and Bank Management
CHAPTER 09 (Part B) Banking and Bank Management Financial Environment: A Policy Perspective S.C. Savvides Learning Outcomes Upon completion of this chapter, you will be able to: Discuss the developments
More informationBOGAZICI UNIVERSITY - DEPARTMENT OF ECONOMICS FALL 2016 EC 344: MONEY, BANKING AND FINANCIAL INSTITUTIONS - PROBLEM SET 2 -
BOGAZICI UNIVERSITY - DEPARTMENT OF ECONOMICS FALL 2016 EC 344: MONEY, BANKING AND FINANCIAL INSTITUTIONS - PROBLEM SET 2 - DUE BY OCTOBER 10, 2016, 5 PM 1) Every financial market has the following characteristic.
More informationEconomia Finanziaria e Monetaria
Economia Finanziaria e Monetaria Lezione 11 Ruolo degli intermediari: aspetti micro delle crisi finanziarie (asimmetrie informative e modelli di business bancari/ finanziari) 1 0. Outline Scaletta della
More informationChapter 2. An Overview of the Financial System. 2.1 Function of Financial Markets
Chapter 2 An Overview of the Financial System 2.1 Function of Financial Markets 1) Every financial market has the following characteristic: A) It determines the level of interest rates. B) It allows common
More informationAsymmetric Information
Asymmetric Information 16 Introduction 16 Chapter Outline 16.1 The Lemons Problem and Adverse Selection 16.2 Moral Hazard 16.3 Asymmetric Information in Principal Agent Relationships 16.4 Signaling to
More informationThe Financial System
The Financial System Money Discussed in the last class Financial Instruments Financial Markets Financial Intermediaries Monitoring Bodies Importance of the Financial System Efficient allocation of capital
More informationECON 3303 Exam 4 Summer MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
ECON 3303 Exam 4 Summer 2017 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following would not be a way to increase the return
More informationUncertainty. The St. Petersburg Paradox. Managerial Economics MBACatólica
Fernando Branco 2006-2007 Fall Quarter Session 9 Part II Uncertainty Most managerial decisions are taken under uncertainty. Some markets trade on the basis of uncertainty (e.g., insurance, stock market).
More informationEconomics 101A (Lecture 25) Stefano DellaVigna
Economics 101A (Lecture 25) Stefano DellaVigna April 29, 2014 Outline 1. Hidden Action (Moral Hazard) II 2. The Takeover Game 3. Hidden Type (Adverse Selection) 4. Evidence of Hidden Type and Hidden Action
More informationFINANCIAL MARKETS FINANCIAL INSTRUMENTS FINANCIAL INSTITUTIONS. Lecture 2 Monetary policy FINANCIAL MARKETS
FINANCIAL MARKETS FINANCIAL INSTRUMENTS FINANCIAL INSTITUTIONS Lecture 2 Monetary policy FINANCIAL MARKETS markets in which funds are transferred from people who have an excess of available funds to people
More information1. Primary markets are markets in which users of funds raise cash by selling securities to funds' suppliers.
Test Bank Financial Markets and Institutions 6th Edition Saunders Complete download Financial Markets and Institutions 6th Edition TEST BANK by Saunders, Cornett: https://testbankarea.com/download/financial-markets-institutions-6th-editiontest-bank-saunders-cornett/
More informationThis lecture examines how banking is conducted to earn the highest possible profit.
Banking and the Management of Financial Institutions This lecture examines how banking is conducted to earn the highest possible profit. The Bank Balance Sheet A. The basic bank balance sheet B. Assets
More informationReview Material for Exam I
Class Materials from January-March 2014 Review Material for Exam I Econ 331 Spring 2014 Bernardo Topics Included in Exam I Money and the Financial System Money Supply and Monetary Policy Credit Market
More informationMarket Failure: Asymmetric Information
Market Failure: Asymmetric Information Ram Singh Microeconomic Theory Lecture 22 Ram Singh: (DSE) Asymmetric Information Lecture 22 1 / 14 Information and Market Transactions Examples Individuals buy and
More informationAn old stock market saying is, "Bulls can make money, bears can make money, but pigs end up getting slaughtered.
In this lesson, you will learn about buying on margin and selling short. You will learn how buying on margin and selling short can increase potential gains on stock purchases, but at the risk of greater
More informationUNCERTAINTY AND INFORMATION
UNCERTAINTY AND INFORMATION M. En C. Eduardo Bustos Farías 1 Objectives After studying this chapter, you will be able to: Explain how people make decisions when they are uncertain about the consequences
More information1. Allocates scarce capital among competing uses 2. Spreads/shares risk 3. Facilitates inter-temporal trade
Chapter 2: The Financial System What it is: What it does: A network of financial intermediaries (banks, S&Ls, credit unions, etc.), facilitators (credit rating agencies, appraisers, etc.), and markets
More informationPART II-FINANCIAL INSTITUTIONS (INTERMEDIARIES)
Boğaziçi University Department of Economics Money, Banking and Financial Institutions L.Yıldıran PART II-FINANCIAL INSTITUTIONS (INTERMEDIARIES) What do banks and other intermediaries do? Why do they exist?
More informationChapter 2. An Overview of the Financial System
Chapter 2 An Overview of the Financial System Function of Financial Markets Perform the essential function of channeling funds from economic players that have saved surplus funds to those that have a shortage
More informationR. GLENN HUBBARD ANTHONY PATRICK O BRIEN. Money, Banking, and the Financial System Pearson Education, Inc. Publishing as Prentice Hall
R. GLENN HUBBARD ANTHONY PATRICK O BRIEN Money, Banking, and the Financial System 2012 Pearson Education, Inc. Publishing as Prentice Hall C H A P T E R 10 The Economics of Banking LEARNING OBJECTIVES
More informationLesson standards. E.6.3 Explain the roles of financial institutions. E.6.6 Explain how interest rates act as an incentive for savers and borrowers.
Lesson standards E.6.3 Explain the roles of financial institutions. E.6.6 Explain how interest rates act as an incentive for savers and borrowers. E.6.7 Compare and contrast different types of financial
More informationChapter 11:1: Saving and Investing:
Chapter 11:1: Saving and Investing: Objectives: We will examine how investing contributes to the free enterprise system. We will examine how the financial system brings together savers and borrowers. We
More informationProfessor Christina Romer. LECTURE 13 ASYMMETRIC INFORMATION March 3, 2016
Economics 2 Spring 2016 Professor Christina Romer Professor David Romer LECTURE 13 ASYMMETRIC INFORMATION March 3, 2016 I. INFORMATION A. Information as an economic good B. Imperfect but symmetric information
More informationManaging Risk in Banking
Managing Risk in Banking FIN 204 Lecture 6.1. Petar Stankov petar.stankov@gmail.com 16 Mar. 2009 P. Stankov (AAC) Lecture 6.1 16 Mar. 2009 1 / 10 Outline 1 Managing Credit Risk 2 Managing Interest Rate
More informationDiscover How Thousands Have Taken Control Of Their Future Through Private Lending!
Investments Secured by Real Estate! Discover How Thousands Have Taken Control Of Their Future Through Private Lending! Here s What We Do: We are a multi-service Company who buys, renovates, sells, and
More informationEconomics of Money, Banking, and Fin. Markets, 10e (Mishkin) Chapter 10 Banking and the Management of Financial Institutions
Economics of Money, Banking, and Fin. Markets, 10e (Mishkin) Chapter 10 Banking and the Management of Financial Institutions 10.1 The Bank Balance Sheet 1) Which of the following statements are true? A)
More informationThe Financial System. Sherif Khalifa. Sherif Khalifa () The Financial System 1 / 74
The Sherif Khalifa Sherif Khalifa () The 1 / 74 The financial system consists of those institutions that match saving with investment. The financial system channels funds from those who save to those with
More informationHow Does the Banking System Work? (EA)
How Does the Banking System Work? (EA) What do you notice when you enter a bank? Perhaps you pass an automated teller machine in the lobby. ATMs can dispense cash, accept deposits, and make transfers from
More informationLecture 26 Exchange Rates The Financial Crisis. Noah Williams
Lecture 26 Exchange Rates The Financial Crisis Noah Williams University of Wisconsin - Madison Economics 312/702 Money and Exchange Rates in a Small Open Economy Now look at relative prices of currencies:
More informationMGT411 Money & Banking Latest Solved Quizzes By
MGT411 Money & Banking Latest Solved Quizzes By http://vustudents.ning.com Which of the following is true of a nation's central bank? It makes important decisions about the nation's tax and public spending
More informationLecture 25 Unemployment Financial Crisis. Noah Williams
Lecture 25 Unemployment Financial Crisis Noah Williams University of Wisconsin - Madison Economics 702 Changes in the Unemployment Rate What raises the unemployment rate? Anything raising reservation wage:
More informationChapter 1-3. Topics in Financial Decisions. Financial System and the Economy. Financial system affects the economic performance It consists of
Chapter 1-3 Topics in Financial Decisions Financial system affects the economic performance It consists of Financial markets Financial institutions Money How does each of the above affect the economy?
More informationdeposit insurance Financial intermediaries, banks, and bank runs
deposit insurance The purpose of deposit insurance is to ensure financial stability, as well as protect the interests of small investors. But with government guarantees in hand, bankers take excessive
More informationPrice Theory Lecture 9: Choice Under Uncertainty
I. Probability and Expected Value Price Theory Lecture 9: Choice Under Uncertainty In all that we have done so far, we've assumed that choices are being made under conditions of certainty -- prices are
More informationChapter Fourteen. Chapter 10 Regulating the Financial System 5/6/2018. Financial Crisis
Chapter Fourteen Chapter 10 Regulating the Financial System Financial Crisis Disruptions to financial systems are frequent and widespread around the world. Why? Financial systems are fragile and vulnerable
More informationFunction of Financial Markets
Chapter 2 An Overview of the Financial System Function of Financial Markets Perform the essential function of channeling funds from economic players (households, firms and govt.) that have saved surplus
More informationChapter 11. The Nature of Financial Intermediation. Learning Objectives. The Economics of Financial Intermediation
Chapter 11 The Nature of Financial Intermediation Learning Objectives Explain the benefits of financial intermediation and how it partially solves the adverse selection and moral hazard problems Understand
More informationMoney, Banking, and the Financial System CHAPTER
Money, Banking, and the Financial System 12 CHAPTER Money: What Is It and How Did It Come to Be? Money: A Definition To the layperson, the words income, credit, and wealth are synonyms for money. In each
More informationDiscussion of Liquidity, Moral Hazard, and Interbank Market Collapse
Discussion of Liquidity, Moral Hazard, and Interbank Market Collapse Tano Santos Columbia University Financial intermediaries, such as banks, perform many roles: they screen risks, evaluate and fund worthy
More informationFunction of Financial Markets
Econ135: Lecture 2 Function of Financial Markets Perform the essential function of channeling funds from economic players that have saved surplus funds to those that have a shortage of funds Direct finance:
More informationMicroeconomics. Frontiers of Microeconomics. Introduction. In this chapter, look for the answers to these questions: N.
C H A P T E R 22 Frontiers of Microeconomics P R I N C I P L E S O F Microeconomics N. Gregory Mankiw Premium PowerPoint Slides by Ron Cronovich 2010 South-Western, a part of Cengage Learning, all rights
More informationChapter 9. Banking and the Management of Financial Institutions. 9.1 The Bank Balance Sheet
Chapter 9 Banking and the Management of Financial Institutions 9.1 The Bank Balance Sheet 1) Which of the following statements are true? A) A bankʹs assets are its sources of funds. B) A bankʹs liabilities
More informationThe Federal Reserve System and Open Market Operations
Chapter 15 MODERN PRINCIPLES OF ECONOMICS Third Edition The Federal Reserve System and Open Market Operations Outline What Is the Federal Reserve System? The U.S. Money Supplies Fractional Reserve Banking,
More informationTHE FINANCIAL SYSTEM 1
THE FINANCIAL SYSTEM 1 Brief intro Ing. Jan Oplatek, MBA Client Operational Head Banking & Capital markets Infosys BPO - Equity, Bond, Derivatives & FX trader - M&A, corp. Finance - Retail banking management
More informationChapter 9. Banks and Bank Management. Depository Institutions: The Big Questions
Chapter 9 Banks and Bank Management Depository Institutions: The Big Questions Where do commercial banks get their funds and what do they do with them? How do commercial banks manage their balance sheets?
More informationOUTLINE October 9, Positive Externality: A Subsidy. Externalities & Taxes or Subsidies. Negative Externality: A Tax 10/4/2017 1:16 PM
OUTLINE October 9, 2017 Externalities, continued The Optimal Subsidy or Tax Cap & Trade Asymmetric Information Moral Hazard Behavioral Economics Positive Externality: A Subsidy PS 2 due 10/11 10/12 in
More informationSaving, Investment, and the Financial System
Chapter 9 MODERN PRINCIPLES OF ECONOMICS Third Edition Saving, Investment, and the Financial System Outline The Supply of Savings The Demand to Borrow Equilibrium in the Market for Loanable Funds The Role
More informationthe Federal Reserve System
CHAPTER 14 Money, Banks, and the Federal Reserve System Chapter Summary and Learning Objectives 14.1 What Is Money, and Why Do We Need It? (pages 456 459) Define money and discuss the four functions of
More information1-1. Chapter 1: Basic Concepts
TEST BANK 1-1 Chapter 1: Basic Concepts 1. Which of the following statements is (are) true? a. A risk-preferring individual always prefers the riskier of two gambles that involve different expected value.
More informationECON DISCUSSION NOTES ON CONTRACT LAW-PART 2. Contracts. I.1 Investment in Performance
ECON 522 - DISCUSSION NOTES ON CONTRACT LAW-PART 2 I Contracts I.1 Investment in Performance Investment in performance is investment to reduce the probability of breach. For example, suppose I decide to
More informationECON 141: Macroeconomics Ch 5: Money and Banking Mohammed Alwosabi
Chapter 5 MONEY, BANKING, AND MONETARY POLICY 1 WHAT IS MONEY Money is anything that is generally accepted as a measure of payment and settling of debt. Money is a stock concept. It is a certain amount
More informationNotes and Reading Guide Chapter 15 Mutual Funds
Notes and Reading Guide Chapter 15 Mutual Funds Name: 1. A mutual fund is an investment that from investors, the money, and invests it in,, and other investments. Each investor owns a of the fund proportionate
More informationWhat is Buying on Credit? What Kinds of Things Are Usually Bought on Credit? What is the Difference Between Open-End Credit and Closed-End Credit?
buying on credit What is Buying on Credit? When you buy on credit, you pay extra for the privilege of spreading your payments out over a period of time. What Kinds of Things Are Usually Bought on Credit?
More informationEXAMPLE OF FAILURE OF EQUILIBRIUM Akerlof's market for lemons (P-R pp )
ECO 300 Fall 2005 December 1 ASYMMETRIC INFORMATION PART 2 ADVERSE SELECTION EXAMPLE OF FAILURE OF EQUILIBRIUM Akerlof's market for lemons (P-R pp. 614-6) Private used car market Car may be worth anywhere
More informationPART THREE. Answers to End-of-Chapter Questions and Problems
PART THREE Answers to End-of-Chapter Questions and Problems Mishkin Instructor s Manual for The Economics of Money, Banking, and Financial Markets, Eleventh Edition 58 Chapter 1 ANSWERS TO QUESTIONS 1.
More informationSavings and Investment
Lecture Notes for Chapter 3 of MACROECONOMICS: An Introduction Savings and Investment Copyright 2000-2009 by Charles R. Nelson 1/8/09 In this chapter we will discuss- How savings becomes investment. Banks
More informationIntroduction and road-map for the first 6 lectures
1 ECON 4335 Economics of Banking, Fall 2016 Jacopo Bizzotto; 1 Introduction and road-map for the first 6 lectures 1. Introduction This course covers three sets of topic: (I) microeconomics of banking,
More informationthe Federal Reserve System
CHAPTER 13 Money, Banks, and the Federal Reserve System Chapter Summary and Learning Objectives 13.1 What Is Money, and Why Do We Need It? (pages 422 425) Define money and discuss its four functions. A
More informationPersonal Finance: The Car Buying Process
Personal Finance: The Car Buying Process Major Purchase #1: Buying a car is typically the second largest purchase that people make. But unlike a home, cars almost always depreciate in value. What does
More informationName: Preview. Use the word bank to fill in the missing letters. Some words may be used more than once. Circle any words you already know.
Preview. Use the word bank to fill in the missing letters. Some words may be used more than once. Circle any words you already know. Advance Organizer Banks, Credit & the Economy Preview. Use the word
More informationFEEDBACK TUTORIAL LETTER
FEEDBACK TUTORIAL LETTER 1 ST SEMESTER 2017 ASSIGNMENT 2 MONEY AND BANKING [MAB611S] Compiled by: Edent Tate Shipanga May 2017 1 1.1 USEFUL INFORMATION FOR WRITING ASSIGNMENTS Below are valuable information
More informationPreview PP542. International Capital Markets. Gains from Trade. International Capital Markets. The Three Types of International Transaction Trade
Preview PP542 International Capital Markets Gains from trade Portfolio diversification Players in the international capital markets Attainable policies with international capital markets Offshore banking
More informationInternational Finance
International Finance FINA 5331 Lecture 3: The Banking System William J. Crowder Ph.D. Historical Development of the Banking System Bank of North America chartered in 1782 Controversy over the chartering
More informationInformation, Risk, and Insurance. Chapter 16
+ Information, Risk, and Insurance Chapter 16 + Chapter Outline n The Problem of Imperfect Information and Asymmetric Information n Insurance and Imperfect Information + Imperfect information and asymmetric
More informationChapter 11: Financial Markets Section 1
Chapter 11: Financial Markets Section 1 Objectives 1. Describe how investing contributes to the free enterprise system. 2. Explain how the financial system brings together savers and borrowers. 3. Explain
More informationPrincipal-agent examples
Recap Last class (October 18, 2016) Repeated games where each stage has a sequential game Wage-setting Games of incomplete information Cournot competition with incomplete information Battle of the sexes
More informationCredit Repair Company
6 Business Credit Secrets Every Credit Repair Company Should Know 6 Business Credit Secrets Every Credit Repair Company Should Know About Business Credit is credit that is obtained in a Business Name.
More informationECON DISCUSSION NOTES ON CONTRACT LAW. Contracts. I.1 Bargain Theory. I.2 Damages Part 1. I.3 Reliance
ECON 522 - DISCUSSION NOTES ON CONTRACT LAW I Contracts When we were studying property law we were looking at situations in which the exchange of goods/services takes place at the time of trade, but sometimes
More informationChapter 1 Why Study Money, Banking, and Financial Markets?
Chapter 1 Why Study Money, Banking, and Financial Markets? MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Markets in which funds are transferred
More informationThe Subprime Crisis: Lessons about Market Discipline
The Subprime Crisis: Lessons about Market Discipline Mark J. Flannery University of Florida Eleventh International Banking Conference, The Credit Market Turmoil of 2007 08: Implications for Public Policy,
More informationChapter 3. Financial Instruments, Financial Markets, and Financial Institutions
Financial Instruments, Financial Markets, and Financial Institutions Problems and Solutions 1. As the end of the month approaches, you realize that you probably will not be able to pay the next month s
More informationThe Financial System: Opportunities and Dangers
CHAPTER 20 : Opportunities and Dangers Modified for ECON 2204 by Bob Murphy 2016 Worth Publishers, all rights reserved IN THIS CHAPTER, YOU WILL LEARN: the functions a healthy financial system performs
More informationManaging Risk in Banking
Managing Risk in Banking MBMM Lecture 6.1. Petar Stankov petar.stankov@cerge-ei.cz 04 Nov. 2008 P. Stankov (CERGE-EI) Lecture 6.1 04 Nov. 2008 1 / 10 Outline 1 Managing Credit Risk 2 Managing Interest
More informationIntroduction. Learning Objectives. Chapter 15. Money, Banking, and Central Banking
Chapter 15 Money, Banking, and Central Banking Introduction Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley have been big names on Wall Street for years. Known as investment
More informationMidterm Exam (20 points) Determine whether each of the statements below is True or False:
Econ 353 Money, Banking, and Financial Institutions Spring 2006 Midterm Exam 2 Name The duration of the exam is 1 hour 20 minutes. The exam consists of 10 problems and it is worth 100 points. Please write
More informationPrinciples of Banking (II): Microeconomics of Banking (3) Bank Capital
Principles of Banking (II): Microeconomics of Banking (3) Bank Capital Jin Cao (Norges Bank Research, Oslo & CESifo, München) Outline 1 2 3 Disclaimer (If they care about what I say,) the views expressed
More informationCHAPTER 4 INTEREST RATES AND PRESENT VALUE
CHAPTER 4 INTEREST RATES AND PRESENT VALUE CHAPTER OBJECTIVES Once you have read this chapter you will understand what interest rates are, why economists delineate nominal from real interest rates, how
More informationRural Financial Intermediaries
Rural Financial Intermediaries 1. Limited Liability, Collateral and Its Substitutes 1 A striking empirical fact about the operation of rural financial markets is how markedly the conditions of access can
More informationCredit and Going into Debt A. What is credit?
Lesson 4 standards E.6.1 Explain the basic functions of money. E.6.2 Identify the composition of the money supply of the United States. E.6.3 Explain the roles of financial institutions. E.6.6 Explain
More information