Lecture 1 Introduction to Financial Institutions.pdf - Welcome To FINS5530 Financial Institution Management Outside Classroom Communication Policies

Lecture 1 Introduction to Financial Institutions.pdf -...

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Welcome To FINS5530 Financial Institution Management
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Outside Classroom Communication Policies There are three ways to communicate with lecturers outside classroom if you have questions: 1) Raising them in Moodle forum (the preferred method), 2) coming to consultation sessions ( TBA ), and 3) emails (only via your UNSW official email account).
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Lecture 1 Introduction to Financial Institutions
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Overview of lecture topics The goals of the financial system and the importance of a well-functioning financial system. Why financial institutions develop and how they help to achieve the goals of the financial system. FIs function as asset transformers FIs function as brokers. An overview of different types of FIs. Regulations of FIs. Risks of FIs
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Understanding the Importance of FIs
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An overview of the financial system The financial system has five parts, each of which plays a fundamental role in our economy. 1) Money : Medium of exchange, unit of account, store of value. 2) Financial instruments : legal contracts used to transfer resources and risks between suppliers of funds and users of funds. 3) Financial markets : places to buy and sell financial instruments. 4) Financial institutions : institutions that provide a myriad of services that facilitate the flow of funds from savers to investors. 5) Regulators : monitor and stabilize the financial system and economy. The financial system plays two important roles: The first is to channel savings to investments. The second is to allow economic agents to share risks.
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An overview of the financial system Why is the channeling of savings to investments so important to the economy? It produces an efficient allocation of capital, which contributes to higher production and efficiency for the overall economy. Simple case Suppose you have saved $1,000 this year and you do not have any investment opportunities yourself. If there is no financial markets, you will just hold on to the $1,000 and earn no interest. However, Carl the carpenter can use your $1,000 to purchase a new tool that will shorten the time it takes him to build a house, thereby earning an extra $200 per year. If there is a financial market, you can lend him the $1,000 at a fee of $100 per year.
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Understanding the Importance of FIs A World without FIs and the Issues
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Direct finance: without FIs In direct finance, corporations borrow funds directly from households in financial markets by selling them securities, which are claims on the corporation’s future income or assets. We call these securities the primary securities. A balance sheet view of direct finance Households Assets Liabilities Primary Securities Corporations Assets Liabilities Real assets Primary Securities Money Primary Securities
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Issues with direct finance Households face the following costs and risks when they directly invest in primary securities: Information/Monitoring costs Liquidity costs Price risk Transaction costs
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Information and monitoring costs The problem of
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