Lecture01 - 1-1Management of Financial Dr QU BaozhiTA Miss...

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Unformatted text preview: 1-1Management of Financial InstitutionsInstructor: Dr. QU BaozhiTA: Miss CHEN JiaoPhone: (852) 27887312Email:[email protected]: ACAD-P7407Office Hours: Monday 9:30-11:20 AMWednesday 9:30-11:20 AM1-2Syllabus◆Posted on the Blackboard (under the link “Course Information”)1-3Assessment◆Final 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 Industry◆Why Are Financial Intermediaries Special?1-5Without FIsCorporations(net borrowers)Households(net savers)CashEquity & Debt1-6FIs’ Specialness◆Without FIs: Low level of fund flows.•Information costs:»Economies of scale reduce costs for FIs to screen and monitor borrowers •Less liquidity•Substantial price risk1-7With FIsCashHouseholdsCorporationsEquity & DebtFI(Brokers)FI(Asset Transformers)Deposits/Insurance PoliciesCash1-8Functions of FIs◆Brokerage function•Acting as an agent for investors:»e.g. Merrill Lynch, Charles Schwab»Reduce costs through economies of scale»Encourages higher rate of savings•Asset transformer:»Purchase primary securities by selling financial claims to households•These secondary securities often more marketable1-9Difference between Commercial Firms and FIsCommercial FirmsFinancial InstitutionsAssetsReal AssetsPrimary SecuritiesLiabilitiesPrimary SecuritiesSecondary Securities1-10Role of FIs in Cost Reduction◆Information costs:•Investors exposed to Agency Costs»Role of FI as Delegated Monitor (Diamond, 1984)•Shorter term debt contracts easier to monitor than bonds•FI likely to have informational advantage1-11Specialness of FIs◆Liquidity and Price Risk •Secondary claims issued by FIs have less price risk•FIs have advantage in diversifying risks◆Reduced transaction & information costs •economies of scale1-12Other Special Services◆Maturity 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 Regulation◆FIs 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 FIs◆Important 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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Lecture01 - 1-1Management of Financial Dr QU BaozhiTA Miss...

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