Financial Markets and Institutions A European Perspective

by (2012)
ISBN-10 110702594X ISBN-13 9781107025943
211 Flashcards en notities
7 Studenten

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Samenvatting - Financial Markets and Institutions A European Perspective

  • 1 Functions of Financial System

  • What are the main functions of the financial sector?
  • What is the main task of the financial system?
    It is to channel funds form sectors that have a surplus to sectors that have a shortage of funds
  • What does the financial system consist of?
    All financial intermediaries and financial markets, and their relationship to the flow of funds to- and from households, governments, business firms, and foreigners, as well as the financial infrastructure.
  • What is a financial infrastructure?
    It is a set of institutions that enables effective operation of financial intermediars and finanacial markets, including such elements as payment, credit information bureaus, and collateral registries
  • What is the main task of the financial system?
    To channel funds from sectors that have a surplus to sectors that have shortage of funds
  • Explain what direct finance is?
    sectors who are in need of funds borrow from an another sector via a financial market
  • What is a financial market?
    It is a market where participants issue and trade securities
  • What is indirect finance?
    A financial intermediary obtains funds from savers and uses these savings to make loans to a sector in need of finance
  • What is a financial intermediaries?
    These are coalitions of agents that combine to provide financial services, such  as banks, insurances companies, financial companies, mutual funds, pension funds
  • Name a few coalitions of agents of a financial intermediaries?
    banks - insurances - financial companies - mutl funds - pensioen funds
  • Name two financial systems?
    1. Market-based
    2. financial based
  • What is vitally linked to economic growth?
    The functioning of financial systems
  • What are the two main functions of the financial system?
    1. Reducing information- and transactioncosts
    2. Facilitating the trading diversification, and management risk, to explain why the financial sector may stimulate capital formation and/or technological innovation, two of the driving forces of economic growth
  • In what does a financial system help?
    By overcoming an information asymmetry between borrowers and lenders
  • Explain how asymmetry information arises in a ex-ante fase? 
    It arises in a ex-ante because borrowers generally know more about their investment project than lenders. Borrowers most eager to engage in a transaction are the most likely ones to produce an undesirable outcome for lender (adverse selection
  • What are the causes of high informations costs?
    They keep the funds from flowing to their  highest productive use.
  • When does asymmetry problem occures in the ex-post?
    When borrowers, not investors, can observe actual behaviour. 
  • What kind of risk is there once a loan has been granted?
    There is a risk that barrowers will engage in activities that are undesirable from perspetive of the lender (moral hazards)
  • What is the difference between the roles of financial markets and financial intermediaries?
    Intermediaries are necessary for the successful functioning of the markets.
  • In the EU were do they rely on.. which market? 
    These countries have bank-based system and rely on banks
  • What do all countries have incommon  with all financial systems regarding investment by firms?
    Most investments by firms in the industrial countries are financed through retained earnings (ingehouden winsten) regardless financial market and intermediaries.
  • Characterise a disruption  in the financial system?
    Sharp declines in asset prices & failure of financial intermediaries -> economic downturns
  • Explain why financial development may stimulate economic growth?
    A well-functionig financial system that direct funds to their most productive use is crucial for economic development (als er obstakels zijn om geld naar behoevende te krijgen dan staakt de economie). A well-functioning system is a vitally linked to economic growth.
  • How do financial intermediaries improve resource allocation?
    By reducing the cost of acquiring and processing information.
  • What are the pro's regarding intermediaries with an investment?
    Without intermediaries, each investor would face the large fixed cost associated with  evaluating investment projects. Plus identifying new technological innovation and new entrepreneurs

  • Why does the financial sector stimulate capital formation?
    Financial intermediaries can reduce transaction cost  by pooling the funds of small savers. Also by overcoming information asymmetries by lowering information costs
  • Why does the financial sector stimulate technological innovation?
    1) Progress in information tech. has facilitated the development of advanced risk management models 2) without innovation fs would be locked into illiquid long-term investments (poss to hold liquid assets and transform into long term capital investment) 3) Securitisation is possible illiquid assets -> liquid assets
  • What is the role of government?
    1) protect property 2) transparency 3) regulation & supervision 4) competition policy
  • How can foreign participants have an effect on liberalisation?
    1) opening up to foreign markets 2) foreign intermediaries

  • Why is a government regulation needed to protect property rights?
    If it's not clear who is entitled to perform a transaction, exchange will be unlikely.
  • Why is government regulation needed for transparency?
    So that providers of funds can take better decisions on how to allocate their money
  • Why is government regulation and supervision needed for soundness?
    Intermediaries have  an incentive to take too many risk -> more revenues. government may provide depositors with deposit-security (this will to help intermediaries and will take more risk) Investors may fail because of risk and contagion)

  • Why is government regulation needed for competition policy?
    Price fixing - support from the banks (state aid)  
  • What are the benefits if it becomes possible to lend or borrow in foreign financial markets?
    opening up the domestic financial market and competition from financial intermediaries in foreign companies = financial liberalisation
  • What are the pro's of bank-based system?
    Investment smoothing, keeping info to themselves, corporate governance, inexpensive/ basic risk model, greater asses to capital, low risk products.
  • Explain the various corporate governance mechanisme?
    1) banks appointment of the board of directors (to monitor company) 2) manager's compensation depend nonperformance firm 3) hostile takeover
  • Why may a take over threat not work?
    1) information asymmetry, ill informed outsider 2) free rider problem 3)firms can take action to weaker position of the firm
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Voorbeelden van vragen in deze samenvatting

What are the main functions of the financial sector?
4
What is a financial infrastructure?
4
What is the main task of the financial system?
4
Explain what direct finance is?
4
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