IntroROLE OF FINANCIAL MARKETS &

INSTITUTIONS

Dr. Clay M. MoffettCameron 220 – O

moffettc@uncw.edu

1

Intro

Syllabus:

Grading Attendance Homework Read the chapters before class Contacting moi….

Who’s who?

Chapter 1?

The US is a fully developed market economy An efficient banking system. An active and liquid securities market. A well defined insurance network. A highly developed system for consumer and

business financing An increasing demand for financial specialists to

analyze, manage, and advise.

1. Primary markets - facilitate the issuance of new securities

2. Secondary markets facilitate - the trading of existing securities, which allows for a change in the ownership of the securities

a. Liquidity is the degree to which securities can easily be liquidated (sold) without a loss of value. Marketability?

b. Marketability? If a security is illiquid, investors may not be able to find a willing buyer for it in the secondary market and may have to sell the security at a large discount just to attract a buyer.

5

Efficient Allocation of Resources Provide funds to most efficient investments Provide Capital Surplus to Capital Deficit units

Risk Management & Risk Reduction Provide hedging instruments Diversify investments to reduce risk

Efficient Transfer of Financial Claims Provide low cost liquidity services Facilitate efficient movement of capital

6

Money Market Instruments Maximum 1 year maturities T-Bills, Commercial Paper, Bankers Acceptances

Capital Market Instruments Long maturity debt securities (Bonds) Stocks

Derivative Securities Options Futures

7

Depository Institutions Banks, Credit Unions, Savings & Loan Associations

Contractual Savings Institutions Insurance Companies, Pension Funds

Investment Intermediaries Mutual Fund Companies, Finance Companies

8

9

1. Following the abrupt increase in home prices in the 2004-2006 period, many financial institutions increased their holdings of mortgages and mortgage-backed securities.

2. In 2007-2008 period, mortgage defaults increased and home values declined substantially.

10

1. Systemic Risk is the spread of financial problems, among financial institutions and across financial markets, that could cause a collapse in the financial system.

2. Mortgage defaults affected financial firms in several ways:

a. Mortgage originators sold mortgages to other financial institutions shortly before the crisis.

b. Many other financial institutions invested in derivatives and were exposed to the crisis.

c. Some financial institutions relied on short-term funding and used MBS as collateral.

d. Decline in home building activity caused a decrease in the demand for many related businesses leading to a weak economy.11

1. Emergency Economic Stabilization ActIntended to resolve the liquidity problems of financial institutions and to restore the confidence of the investors who invest in them.

2. Federal Reserve Actions - Fed provided emergency loans to many securities firms that were not subject to its regulation.

3. Financial Reform Act of 2010a.Also referred to as Wall Street Reform Act or Consumer Protection Actb.Mortgage lenders must verify the income, job status, and credit history of mortgage applicants before approving mortgage applications.

12

Regulatory Divisions by the US Congress Security Markets Depository Institutions

Objectives of Regulation Protect consumers/investors Insure a level playing field

Rationale for Regulation/Deregulation Increase information flow Insure financial soundness

13

14

1. Required Disclosure:• The Securities Act of 1933 was intended to ensure

complete disclosure of relevant financial information on publicly offered securities and to prevent fraudulent practices in selling these securities.

• The Securities Exchange Act of 1934 extended the disclosure requirements to secondary market issues.

2. Regulatory Response to Financial Reporting ScandalsThe Sarbanes-Oxley Act required that firms provide more

complete and accurate financial information (cough, cough)….

Financial Services / Infrastructure Follows international trade patterns and practices Stage of host market development key to service

levelF

oreign Investment (Capital shifts) Dependent upon availability of information Restrictions on direct investment Affected by the political climate Ability to repatriate profits

15

Focus on “Interpreting Financial News” for each chapter.

What is the difference between Surplus and Deficit units?

How do Primary markets differ from Secondary markets?

What is the difference between Money and Capital markets?

What is Marketability and how does it differ from Liquidity and why is it important?

How Depository and Non-Depository, Commercial/Investment institutions differ in services provided?

16