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PowerPoint Slides forFinancial Markets and Institutions

5th EditionBy

Jeff MaduraPrepared by

Ann M. Hackert and Steve ByersIdaho State University

© 2001 South-Western College Publishing Company

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Chapter 1

Role of Financial Markets and Institutions

© 2001 South-Western College Publishing Company

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Chapter Objectives

Describe the types of financial markets Describe the role of financial institutions with

financial markets Identify the types of financial institutions that

facilitate transactions

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Overview of Financial Markets

Financial Market: a market in which financial assets (securities) such as stocks and bonds can be purchased or sold

Provide for financial intermediation--financial savings (Surplus Units) to investment (Deficit Units)

Provide payments system Provide means to manage risk

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Broad Classifications of Financial MarketsMoney versus Capital Markets Primary versus Secondary MarketsOrganized versus Over-the-Counter Markets

Overview of Financial Markets

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Primary vs. Secondary MarketsPrimary Market

• New issue of securities

• Exchange of funds for financial claim

• Funds for borrower; an IOU(I owe you,借据 ) for lender

Overview of Financial Markets

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Primary vs. Secondary MarketsSecondary Market

• Trading previously issued securities

• No new funds for issuer

• Provides liquidity for seller

Overview of Financial Markets

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Money vs. Capital MarketsMoney Market

• Short-term, < 1 year

• High quality issuers

• Debt only

• Primary market focus

• Liquid market--low returns

Overview of Financial Markets

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Money vs. Capital MarketsCapital Market

• Long-term, >1Yr

• Range of issuer quality

• Debt and equity

• Secondary market focus

• Financing investment--higher returns

Overview of Financial Markets

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Organized vs. OTC MarketsOrganized

• Visible marketplace

• Members trade

• Securities listed

• Example: New York Stock Exchange

Shanghai Stock Exchange

Shenzhen Stock Exchange

Overview of Financial Markets

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Organized vs. OTC MarketsOTC Market

• Wired network of dealers

• No central, physical location

Overview of Financial Markets

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Money market securities Capital market securities Derivative securities

Financial contracts whose value is derived from the values of underlying assets

Securities Traded in Financial Markets

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Securities: Debt or Equity?Debt Securities: Contractual obligations

(IOU) of Debtor (borrower) to Creditor (lender)Equity Securities: Claim with ownership

rights and responsibilities

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Security prices reflect available information New information is quickly included in security

prices Investors balance liquidity, risk, and return

needs

Financial Market Efficiency

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Financial Market Regulation

Why Government Regulation?To Promote Efficiency

• High level of competition

• Efficient payments mechanism

• Low cost risk management contracts

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Why Government Regulation?To Maintain Financial Market Stability

• Prevent market crashes–Circuit breakers(上限条款 )–Federal Reserve discount window

• Prevent Inflation--Monetary policy• Prevent Excessive Risk Taking by

Financial Institutions

Financial Market Regulation

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Why Government Regulation?To Provide Consumer Protection

• Provide adequate disclosure• Set rules for business conduct

To Pursue Social Policies• Transfer income and wealth• Allocate saving to socially desirable areas

–Housing–Student loans

Financial Market Regulation

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Financial Market Globalization

Increased international funds flow Increased disclosure of informationReduced transaction costsReduced foreign regulation on capital flows Increased privatization

Results: Increased financial integration--capital flows to highest expected risk-adjusted return

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Role of Financial Institutions in Financial Markets

Information processing Serve special needs of lenders (liabilities) and

borrowers (assets)By denomination and termBy risk and return

Lower transaction cost Serve to resolve problems of market

imperfection

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Role of Financial Institutions in Financial Markets

C O M M E R IC IA L B A N K S$ $ $ To ta l A sse ts

S A V IN G S IN S TITU TIO N S$ $ $ To ta l A sse ts

C R E D IT U N IO N S$ $ To ta l A sse ts

TY P E S O F D E P O S ITO R Y F IN A N C IA L IN S TITU TIO N S

Depository Financial Institutions

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Role of Financial Institutions in Financial Markets

Role of Depository InstitutionsOffer deposit accountsRepackage funds received from deposits to

provide loans of size and maturity desiredAccept the risk on the loans providedExpertise in evaluating creditworthinessDiversify loans among numerous borrowers

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Role of Financial Institutions in Financial Markets

Types of Nondepository Financial InstitutionsFinance Companies Mutual FundsSecurities Companies Insurance Companies Pension Funds

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Role of Financial Institutions in Financial Markets

Role of Nondepository Financial InstitutionsFocused on capital marketLonger-term, higher risk intermediationLess focus on liquidityLess regulation

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Comparison of Financial Institutions

Sources of funds Uses of funds Competition between financial institutions Consolidation of financial institutions

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Global Expansion by Financial Institutions

International expansion International mergers Impact of the single European currency Emerging markets