OH-Ch2&3 - 1 Chapter 2 An Overview of the Financial...

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1 Chapter 2: An Overview of the Financial Sys- tem - Continued
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1.1 Function of Financial Intermediaries: Indirect Finance Lower transaction costs { Economies of scale: the reduction in transaction costs per dollar of transactions as the size (scale) of transactions increases { Liquidity services: services that make it easier for customers to conduct transactions Risk Sharing { Asset Transformation
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{ Asymmetric Information { Adverse Selection (before the transaction) - Risky borrowers are more willing to pay high interest rates { Moral Hazard (after the transaction) - Borrowers do not have in- centives to work hard to repay loans See Tables 3 and 4
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1.2 Regulation of the Financial System Increasing the information available to investors { Reduce adverse selection and moral hazard problems { Reduce insider trading Ensuring the Soundness of Financial Intermediaries { Restrictions on entry { Disclosure { Restrictions on Assets and Activities
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{ Deposit Insurance { Limits on Competition { Restrictions on Interest Rates n See Table 5
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2 Chapter 3: What Is Money?
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2.1
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This note was uploaded on 07/17/2008 for the course ECON 520 taught by Professor Ogaki during the Spring '07 term at Ohio State.

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OH-Ch2&3 - 1 Chapter 2 An Overview of the Financial...

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