Lecture01 - 1-1Management of Financial...

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Unformatted text preview: 1-1Management of Financial InstitutionsInstructor: Dr. QU BaozhiTA: Miss CHEN JiaoPhone: (852) 27887312Email:baozhiqu@cityu.edu.hkOffice: ACAD-P7407Office Hours: Monday 9:30-11:20 AMWednesday 9:30-11:20 AM1-2SyllabusPosted on the Blackboard (under the link Course Information)1-3AssessmentFinal examination (two hour) 60%Coursework40%Case Study(10%)Written assignments & quiz (20%)Contribution to in-class discussion and attendance(10%)1-4An Introduction to the Financial Services IndustryWhy Are Financial Intermediaries Special?1-5Without FIsCorporations(net borrowers)Households(net savers)CashEquity & Debt1-6FIs SpecialnessWithout FIs: Low level of fund flows.Information costs:Economies of scale reduce costs for FIs to screen and monitor borrowers Less liquiditySubstantial price risk1-7With FIsCashHouseholdsCorporationsEquity & DebtFI(Brokers)FI(Asset Transformers)Deposits/Insurance PoliciesCash1-8Functions of FIsBrokerage functionActing as an agent for investors:e.g. Merrill Lynch, Charles SchwabReduce costs through economies of scaleEncourages higher rate of savingsAsset transformer:Purchase primary securities by selling financial claims to householdsThese secondary securities often more marketable1-9Difference between Commercial Firms and FIsCommercial FirmsFinancial InstitutionsAssetsReal AssetsPrimary SecuritiesLiabilitiesPrimary SecuritiesSecondary Securities1-10Role of FIs in Cost ReductionInformation costs:Investors exposed to Agency CostsRole of FI as Delegated Monitor (Diamond, 1984)Shorter term debt contracts easier to monitor than bondsFI likely to have informational advantage1-11Specialness of FIsLiquidity and Price Risk Secondary claims issued by FIs have less price riskFIs have advantage in diversifying risksReduced transaction & information costs economies of scale1-12Other Special ServicesMaturity intermediation.Transmission of monetary policy.Credit allocation (Areas of special need such as home mortgages).Intergenerational transfers or time intermediation.Payment services (FedWire and CHIPS).Denomination intermediation.1-13Specialness and RegulationFIs receive special regulatory attention.Reasons: Special services provided by FIs in general.Institution-specific functions such as money supply transmission (banks), credit allocation (thrifts, farm banks), payment services (banks, thrifts), etc.Negative externalities arise if these services are not provided.1-14Regulation of FIsImportant features of regulatory policy:Protect ultimate sources and users of savings.Including prevention of unfair practices such as redlining and other discriminatory actions....
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This note was uploaded on 02/22/2009 for the course ECONOMICS 4313 taught by Professor Tsui during the Spring '09 term at HKU.

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Lecture01 - 1-1Management of Financial...

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