Lecture 6 Chpt 11 D2L 2011

Lecture 6 Chpt 11 D2L 2011 - Fin 320 Chapter 11: The...

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Fin 320 Chapter 11: The Economics of Financial Intermediation The Yield Curve and Recessions Lecture 6 1
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Economics of Financial Intermediation: 1. What are financial intermediaries and what do they do? 2. What information problems exist in financial relationships and how do intermediaries help solve them? 2
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Financial Intermediaries Businesses whose assets and liabilities are primarily financial instruments Economic growth requires a well-functioning financial system. 3
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Role of Financial Intermediaries: Problems They Solve Lower transactions costs Reduce information costs 6
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The Role of Financial Intermediaries In their role as financial intermediaries, financial institutions perform five functions: 1. Pooling the resources of small savers, 2. Providing safekeeping and accounting services, as well as access to payments system, 3. Supplying liquidity by converting savers’ balances directly into a means of payment whenever needed, 4. Providing ways to diversify risk, and 5. Collecting and processing information in ways that reduce information costs. 7
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Five Roles of Financial Intermediaries 1. Pool savings Put together the 100 savers with $1000 each and create a $100,000 mortgage 8
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Five Roles of Financial Intermediaries 2. Accounting, Safekeeping, and Access to the Payments System Hold funds safely Monthly Statements, keep track of deposits and withdrawals and help us manage our financial lives ATMs – way to get cash 9
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Five Roles of Financial Intermediaries 3. Providing Liquidity Pay interest at the same time that they give you emergency access. Can do it because not everyone will need it at the same time. 10
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Five Roles of Financial Intermediaries 4. Diversifying Risk Your deposit is distributed into small share of many loans Access to standard portfolio diversification 11
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5. Collecting and processing Information services Bank is an information warehouse. Collecting and processing standardized financial information.
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Lecture 6 Chpt 11 D2L 2011 - Fin 320 Chapter 11: The...

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