Lecture 16 - Why financial institutions exist

Lecture 16 Why - Financial Markets and Institutions Why do Financial Institutions exist(The Financial Structure of Firms Mishkin Eakins 6th ed

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Financial Markets and Institutions Why do Financial Institutions exist? (The Financial Structure of Firms) th ed. Chapter 15
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Overview Financial Structures of economies: stylised facts Role of financial intermediaries: Traditional view: asset transformer Modern view: adverse selection; moral hazard. Solutions brought by the financial system
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FIRM Banks BONDS STOCKS external financing Reinvested Cash Flows Own cash Securities markets Non- Banks Loans 4 main sources of external financing: -Bank loans -Non-bank loans -Bonds -Stocks
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15-4 Sources of Foreign External Finance Some countries are said market oriented (typically US, UK ), others are bank oriented (typically Germany, Japan).
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External financing: facts 1. Stocks are NOT the most important source of finance for businesses 2. Issuing marketable securities NOT primary funding source for businesses 3. Indirect finance (financial intermediation) is far more important than direct finance 4. Banks are most important source of external finance
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External financing: facts (2) 5. Financial system is among most heavily regulated sectors of economy 6. Only large, “well established” firms have access to securities markets 7. Collateral is prevalent feature of debt contracts 8. Debt contracts are typically extremely complicated legal documents with restrictive covenants
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1. Transaction costs Mr. Smith €5,000 Stocks Bond >€10,000 - Fee - Few Not even one. .. Large transaction costs Little diversified Direct purchase: Pooling Mrs. Rossi €7,000 ... ... ... Well diversified Low transaction cost
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Transactions costs hinder flow of funds to people with productive investment opportunities Financial intermediaries make profits by reducing transactions costs 1.Take advantage of economies of scale (example: mutual funds) 2.Develop expertise to lower transactions costs Explains “Fact 3” (FI main source of finance) 1. Transaction costs
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2. Maturities Mrs. Rossi
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This note was uploaded on 10/12/2011 for the course BIEMF 30006 taught by Professor Ippolito during the Fall '10 term at Università Bocconi.

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Lecture 16 Why - Financial Markets and Institutions Why do Financial Institutions exist(The Financial Structure of Firms Mishkin Eakins 6th ed

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