...TOPIC 7 – FINANCIAL MARKETS Eco 304L Fall 2014 Topic 6 – Financial Markets The Financial System -‐ How Businesses Finance Themselves Saving and Investment (National Income Accounting Redux) Ricardian Equivalence and Temporary vs. Permanent Taxt Cuts The Market For Loanable Funds – Modeling Financial Markets 1 Topic 6 – Financial Markets The Financial System -‐ How Businesses Finance Themselves The Financial System The Pinancial system is made up of !inancial institutions that bring borrowers and lenders together ¤ Financial markets: institutions through which borrowers and lenders come together directly ¤ bond markets n stock markets n ¤ Financial intermediaries: organizations that interact with borrowers and lenders separately and bring them together indirectly banks n mutual fund n 2 Financing a company ¨ How can a company raise funds? Self-‐!inance ¤ Borrow indirectly...
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...2:45 PM Page 1 Part 1 The Global Financial System in Perspective Try to imagine living in a world in which there are no financial institutions, no financial markets, and no financial assets. In such a world, there would be no opportunity to borrow against future income in order to purchase a home or an automobile, or to finance an education. Nor would you be able to save some of your current income (and, thereby, accumulate wealth over time) to handle the future expenses of a growing family or retirement. Businesses could not come up with the resources needed to produce the goods and services you like to consume. There would be no way to acquire insurance against sickness and death. Even the simple act of buying food would become extremely difficult, requiring you to barter simply to survive. The financial system has emerged to fill these and many other critical needs that require some separation in time between the use of resources (such as capital and labor), the production of goods and services, and the actual consumption of those goods and services desired. Financial markets and institutions deal with these issues and provide for the smooth functioning of modern economies, enabling resources to find their way to their most highly valued use. In so doing, the financial system dramatically enhances the efficiency of the economy and raises our standard of living. In order to set the stage for our study of the global financial system, Part One of Money and Capital Markets...
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...INDIAN FINANCIAL SYSTEM 1. The Financial System – Nature, Evolution and Structure 1.1 The Nature of Financial System What is a Financial System? A system is generally defined as an ordered, organized and comprehensive assemblage of facts, principles or components relating to a particular field and working for a specified purpose. A Financial System aims at proper redistribution of surplus financial resources for the equitable growth of an economy. “Financial System is a set of complex and closely inter-mixed financial institutions, markets, instruments, services, practices, procedures and so on.” An economy's financial system exists to organize the settlement of payments, to raise and allocate finance, and to manage the risks associated with financing and exchange. A developed financial system is one that has a secure and efficient payment system, security markets and financial intermediaries that arrange financing, and derivative markets and financial institutions that provide access to risk management instruments. It does so by transfer of various economic units. Goldsmith, R.W., The Flow of Capital funds in the war Economy, New York, Columbia, 1965, p.28 – designated various economic units into three categories; (i) Savings-surplus units> those units whose savings are in excess of investments, (ii) Economic Units> in whose case the investments exceed their savings referred to as savings-deficit units and (iii) Neutral Units> in whose case savings are equal...
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...Financial Institutions, Instruments and Markets—7th edition Instructor’s Resource Manual Christopher Viney and Peter Phillips Chapter 1 A modern financial system Learning objective 1.1: explain the functions of a modern financial system • The introduction of money and the development of local markets to trade goods were the genesis of the financial system of today. • Money is a medium of exchange that facilitates transactions for goods and services. • With wealth being accumulated in the form of money, specialised markets developed to enable the efficient transfer of funds from savers (surplus entities) to users of funds (deficit entities). • A modern financial system comprises financial institutions, instruments and markets that provide a wide range of financial products and services. • A financial system encourages accumulated savings which are then available for investment within an economy. • Financial instruments incorporate attributes of risk, return (yield), liquidity and time–pattern of cash flows. Savers are able to satisfy their own personal preferences by choosing various combinations of these attributes. • By encouraging savings, and allocating savings to the most efficient users, the financial system has an important role to play in the economic development and growth of a country. Learning objective 1.2: categorise the main types of financial institutions, being depository financial institutions, investment banks and merchant banks,...
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...the Department of Finance took over the task of banking supervision. | | | 1939 | A bill establishing a central bank was drafted by Secretary of Finance Manuel Roxas and approved by the Philippine Legislature. However, the bill was returned by the US government, without action, to the Commonwealth Government. | | | 1946 | A joint Philippine-American Finance Commission was created to study the Philippine currency and banking system. The Commission recommended the reform of the monetary system, the formation of a central bank and the regulation of money and credit.The charter of the Central Bank of Guatemala was chosen as the model of the proposed central bank charter. | | | August 1947 | A Central Bank Council was formed to review the Commission’s report and prepare the necessary legislation for implementation. | | | February 1948 | President Manuel Roxas submitted to Congress a bill “Establishing the Central Bank of the Philippines, defining its powers in the administration of the monetary and banking system, amending pertinent provisions of the Administrative Code with respect to the currency and the Bureau of Banking, and for other purposes. | | | 15 June 1948 | The bill was signed into law as Republic Act No. 265 (The Central Bank Act) by President Elpidio Quirino. | | | 3 January 1949 | The Central Bank of the Philippines (CBP) was inaugurated and formally opened with Hon. Miguel Cuaderno, Sr. as the first governor.The broad...
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...Abstract Financial intermediation is an important activity in the economy because it allows funds to be channeled from people who might otherwise not put them to productive use to people who will ultimately put the funds to productive uses. In line with the assumption that banking sector plays an important role in financing the investment projects, successive governments in Nigeria have carried out reforms and institutional innovations in the banking sector. The overall intention of these reforms has been to ensure financial stability so as to influence the growth of the economy and also enhance banks to play a critical role of financial intermediation in Nigeria. However, despite the fact that Nigerian banks have undergone series of restructuring/reforms aimed at strengthening the banks’ ability to efficient service delivery and fund the real sector, problems such as; inefficiency in allocating funds to the real sector, lack of long-dated funding, neglect of the core private sector in terms of credit extension, weak capacity of the banks to fund the real sector, low-level activities of banks, and illiquidity still lingers. This study therefore, examines empirically the impact of financial intermediation on the development of the Nigerian economy with the aim of determining the importance of financial intermediaries and its influence. This study found out that the financial intermediaries (banks) in Nigeria exhibit inefficiency and weak capacity in the allocation of funds to...
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...gains: ................................................... 3 ð Determination of employment in the short period: ................................................................. 3 ð The rudiments of a theory of expenditure and critique of Say’s law: ....................................... 4 ð A more detailed theory of expenditure: .................................................................................. 4 ð Uncertainty, expectation and confidence: ............................................................................... 4 ð Investment, asset choice and liquidity preference: ................................................................... 4 ð Employment and the essential properties of money: ............................................................... 4 ð Potential instability: ................................................................................................................ 5 ð Investments, saving and banking system:................................................................................. 5 conclusion: ..................................................................................................................................... 5 Page 1 of 5 Keynes’s “GENERAL THEORY” valid only for modern capitalism? This article focuses on the interpretation that restricts the applicability of Keynes General theory for modern capitalism. It makes his...
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...10/22/12 10.2 saving investment and the financial system Economic growth depends on the ability of firms to expand their operations and adopt new technologies Firms lacking sufficient funds to finance expansions and/or the adoption of new technologies may acquire funds from households through financial system Financial system: the system of financial markets and financial intermediaries through which firms acquire funds from households. Economics growth is impossible without a well-functioning financial system. Financial markets: markets where financial securities, such as stocks and bonds, are bought and sold. A financial security is a document that states the terms under which funds pass from the buyers of the security (the lender) to the seller (the borrower). One type of financial market is the stock market. Stock: a financial security that represents partial ownership of a firm. Firms can raise funds by selling shakes of stock in a primary market. The original buyers of stocks may resell them in a secondary market, where most daily trading takes place. While shareholders may receive dividends (portions of a firm’s profits) from stocks, most people purchase stocks for the potential capital gains from selling a stock for more that they can paid for it. Firms do not receive funds from transactions （交易） in secondary markets. Another type of financial market is the bond market. Bond: a financial security that represents a promise to repay a fixed amount of funds ...
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...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 yiel...
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...Jama Ali Osman | 10/19/2013 | | The movie "Inside Job" gives a deep look at the financial crisis as it discusses the reasons of the global financial crisis that has cost people's money, their houses and property and also their jobs. The movie begins with one of the most famous examples that affected by the crisis which is Iceland. Notably by their nature, picturesque view and a strong economy, Iceland began the deregulation policy which would cause major problems in the environment and the economy. When the financial crisis happened, the government was owed billions of money as debt and lots of people lost their money and jobs. The movie then went to explain the roots of the problem as the crisis was actually doing not happened suddenly but began thirty years ago at the former President Reagan’s era. He reorganized investment laws and reduced suppression to allow the saving and loan companies to make riskier investments with their customer’s money. As the deregulation was implemented, the illegal activities that are done by the biggest financial companies was increasing such as money laundry, customers defraud and etc. The legal and legislative lenient were the reason to create new and suspicious products called derivatives which would have a bad effect in the economy. Using derivatives, they can gamble on anything even in bankruptcy of the company and failure of investment. Although there were attempt to regulate these products but the political forces were against...
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...are the capital and current account tied together so closely? In the balance of payment, current account and capital account are tied together by an accounting identity. Current account on one side and the capital and financial accounts on the other side should balance each other out due to the double entry of each transaction. [ Current Account + Financial Account + Capital account + Official Reserve Account = 0 ] For example, if a country has a positive capital and financial accounts, it will have a current account deficit - because the debit is more than the credit. It means that this country is borrowing and using other countries savings to meet its local investment and consumption demands. In contrast, if a country has a negative capital and financial accounts, it will have a current account surplus - because the credit is more than the debit. It means that this country is using its saving for investing. In Singapore, the government is heavily managed the country’s economy. It promotes high levels of savings. Also, the Monetary Authority of Singapore focuses on accumulating foreign reserves. Consequently, Singapore became a net creditor to other countries. It has a large current account surplus and saving accumulation in excess of domestic investment demand, which lead to produce a long-term real appreciation of the SGD. 2. What is a real exchange rate? What determines real exchange rates in the long-run? Real Exchange Rate = Nominal Exchange Rate - Inflation It’s...
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...The Growth Record of the Indian Economy, 1950-2008: A Story of Sustained Savings and Investment Rakesh Mohan* I deem it a real privilege to visit the Institute of Economic Growth to deliver the keynote address at this prestigious conference on growth and macroeconomic issues and challenges in India. I am particularly happy that this Conference is being organised by the Institute as a part of its Golden Jubilee celebrations. The Institute has established a long and creditable track record of contributing to economic research consistently over its 50 years history. Its research has greatly enriched the debate on the conduct and formulation of economic policy over the years. The theme selected for the conference is befitting in the present context as we grapple with issues and challenges for sustaining the elevated growth momentum that we have now achieved. This has assumed added contemporary significance in the wake of expected moderation in global growth due to a projected slowdown in the US and some other advanced economies. Whereas emerging markets, including India have so far not been greatly affected by the financial turbulence in advanced economies, the increasing global uncertainties need to be watched and guarded against appropriately. Although our growth process continues to be dominated by domestic factors, we need to recognise some changing global patterns, which could have implications for the macroeconomic prospects of the Indian economy. Accordingly, in my address...
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...Journal of Money, Investment and Banking ISSN 1450-288X Issue 6 (2008) © EuroJournals Publishing, Inc. 2008 http://www.eurojournals.com/finance.htm Costing the Banking Services: A Management Accounting Approach Jordi Carenys Professor at the Management Control Department. EADA Business School EADA, c/o Aragó 204, 08011 Barcelona, Spain E-mail: jcarenys@eada.edu Tel: 934 520 844; Fax: 933 237 317 Web: www.eada.edu Xavier Sales Professor at the Management Control Department. EADA Business School E-mail: xsales@eada.edu Abstract The present study aims to outline the characteristics of the cost systems used in banking institutions. It does so by describing the partial costs and full cost systems in banking institutions. It then looks at the limitations of these approaches to the current competitive conditions and goes on to consider the applicability of the activity based costing system in the allocation of indirect transformation costs to branches, products and customers. Finally, we will look at the findings of a questionnaire to Spanish savings banks in order to evaluate how widespread these systems are and how they are used in savings banks. We found that direct costs systems predominate in customer and products entries whereas full costs systems are much more widespread in the case of branches. Furthermore, we also found that the use of activity based costs systems is very limited. Keywords: Saving banks Cost structure Management accounting Cost systems Activity based costing...
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...CHANGING FINANCIAL-SERVICES SECTOR Goal of This Chapter: In this chapter you will learn about the many roles financial service - providers play in the economy today. You will examine how and why the banking industry and the financial services marketplace as a whole is rapidly changing, becoming new and different as we move forward into the future. You will also learn about new and old services offered to the public. Key Topics in This Chapter • Powerful Forces Reshaping the Industry • What Is a Bank? • The Financial System and Competing Financial-Service Institutions • Old and New Services Offered to the Public • Key Trends Affecting All Financial-Service Firms • Appendix: Career Opportunities in Financial Services Chapter Outline I. Introduction: Powerful Forces Reshaping the Industry II. What Is a Bank? A. Defined by the Functions It Serves and the Roles It Play: B. Banks and their Principal Competitors C. Legal Basis of a Bank D. Defined by the Government Agency That Insures Its Deposits III. The Financial System and Competing Financial-Service Institutions A. Roles of financial system B. The competitive challenge for banks C. Leading Competitors with banks • Savings Associations • Credit Unions • Money Market Funds • Mutual Funds • Hedge Funds • Security Brokers and Dealers • Investment Banks • Finance Companies • Financial Holding...
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...ANSWERS TO CONCEPT CHECKS, FINANCIAL PLANNING PROBLEMS | | |AND QUESTIONS, AND CASES | CONCEPT CHECK ANSWERS Concept Check 2-1 (p. 38) 1. What are the three major money management activities? The three major money management activities are (1) storing and maintaining financial records and documents, (2) creating personal financial statements, and (3) creating and implementing a budget. (p. 36) 2. What are the benefits of an organized system of financial records and documents? An organized system of financial records provides a basis for: (1) handling daily business activities, such as bill paying; (2) planning and measuring financial progress; (3) completing required tax reports; (4) making effective investment decisions; and (5) determining available resources for current and future spending. (pp. 36-37) 3. For each of the following records, check the column to indicate the length of time the item should be kept. “Short-time period refers” to less than five years. |Document |Short time period |Longer-time period | |Credit card statements |X | | |Mortgage documents | |X | |Receipts for furniture, clothing |X | ...
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