171a notes.doc

171a notes.doc - Financial Institutions and Markets An...

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Financial Institutions and Markets: An Overview Important Principle: A market, institution or security must serve some useful economic purpose and do so efficiently, otherwise it would not exist. The 5 Parts of the Financial System 1. Money: a. Medium of exchange b. Store of value c. Unit of account 2. Financial Instruments: stocks, insurance, mortgages… a. Transfer resources from savers to investors b. Transfer risk 3. Financial Markets: Markets in which we transact financial instruments a. Quick b. Low cost 4. Financial Institutions (FI)*: banks, securities firms, insurance companies … a. Provide access to financial markets b. Collect info about borrowers c. Etc. 1
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a. Responsible for monetary policy b. Regulatory responsibility c. Involved with foreign exchange (in coordination with the US Treasury). *FIs are grouped into two: o Depository Institutions – those that accept deposits such as commercial banks and thrifts (such as savings banks, credit unions) o Nondepository Institutions: insurance companies; securities firms; mutual funds; pension funds; investment banks; finance companies; cash checking stores. (Loan sharks are nondepository FIs; they may be injurious to your well-being) Physical characteristic of these parts is constantly evolving. For example, money used to be gold and silver; now it is paper and becoming electronic. Financial markets used to have physical locations; it is becoming a communication system. The System is going through major changes now as the result of the financial turmoil that started in 2007. 2
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This note was uploaded on 09/08/2010 for the course BUS 171A at San Jose State.

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171a notes.doc - Financial Institutions and Markets An...

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