Class 8 - Econ 350 U.S. Financial Systems, Markets and...

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Econ 350 U.S. Financial Systems, Markets and Institutions Class 8 Econ 350 U.S. Financial Systems, Markets, and Institutions Class 8: The structure of the U. S. financial system Welcome back! I hope that you survived the midterm, and that you had a restful and enjoyable weekend. While in the last few classes we focused on money and interest rates, now we focus on banking. In particular, we will look at some principles of banking management, the mechanics of bank finances, and the ways in which the banking system contributes to monetary policy. In today’s class, we will explore various puzzles concerning the structure of the U.S. banking system. We then show how the concepts of transactions costs and information asymmetries can help to explain these puzzles. Course Objectives After today’s class, you should -- be familiar with some characteristics of the U.S. banking system. -- understand the sources of external financing for U.S. non-financial firms. -- be aware of the ways in which banks help to lower the transactions costs of borrowing and lending. -- know the concepts of moral hazard and adverse selection, and the lemons model. -- understand how banks reduce the problems of moral hazard and adverse selection in borrowing and lending. -- appreciate how the patterns of the U.S. banking system can be explained by the concepts of transactions costs, adverse selection and moral hazard. Eight Puzzles of the U.S. Banking System. In Chapter 8, Mishkin lays out eight puzzles of the banking system. These are puzzles in the sense that Mishkin describes various characteristics of U.S. banking, and then shows how several economic concepts can be used to help explain these characteristics. The first four puzzles involve the idea that bank loans, and not stocks and bonds, are the primary source of external financing for U.S. firms. The last four puzzles are concerned with the complexity of the U.S. financial system. The eight puzzles are as follows: 1. Stocks are not the most important source of external financing for U.S. firms. 2. Marketable debt and equity securities are not the primary means in which U.S. businesses finance their operations. 3. Indirect finance is many times more important than direct finance. 4. Banks are the most important source of external funds for U.S. businesses. 61
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Econ 350 U.S. Financial Systems, Markets and Institutions Class 8 These first four deal with the sources of external financing. The next four are concerned with the complexity of the financial system: 5. The financial system is among the most heavily regulated in the economy. 6. Only large, well-established corporations have access to securities markets to finance their activities. 7.
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Class 8 - Econ 350 U.S. Financial Systems, Markets and...

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