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Chap01_Saunders7e_SLIDES

Chap01_Saunders7e_SLIDES - CHAP1 SPECIAL Objectives...

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CHAP-1 WHY ARE FINANCIAL INTERMEDIARIES  SPECIAL? Objectives: Explain the special role of FIs in the financial system and the  functions they provide Explain why the various FIs receive special regulatory  attention Discuss what makes some FIs more special than others Explain the crisis in financial markets 1-1
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WITHOUT FIS 1-2 Corporations (net borrowers) Households (net savers) Cash Equity & Debt
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FIS’ SPECIALNESS Without FIs: Low level of fund flows. Information costs Economies of scale reduce costs for FIs to screen and   monitor borrowers  Less liquidity Substantial price risk 1-3
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WITH FIS 1-4 Cash Households Corporations Equity & Debt FI (Brokers) FI (Asset Transformers) Deposits/Insurance Policies Cash
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FUNCTIONS OF FIS Brokerage function Acting as an agent for investors: e.g. Merrill Lynch, Bank of America Reduce costs through economies of scale Encourages higher rate of savings Asset transformer: Purchase primary securities by selling financial claims to  households These secondary securities often more marketable Transformation of financial risk 1-5
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ROLE OF FIS IN COST REDUCTION Information costs: Investors exposed to Agency Costs Role of FI as Delegated Monitor FI likely to have informational advantage Economies of scale in obtaining information. FI as an information producer Shorter term debt contracts easier to monitor than bonds Greater monitoring power and control  Acting as delegated monitor, FIs reduce information  asymmetry between borrowers and lenders 1-6
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SPECIALNESS OF FIS  Liquidity and Price Risk  Secondary claims issued by FIs have less price risk Demand deposits and other claims are more liquid   More attractive to small investors FIs have advantage in diversifying risks 1-7
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OTHER SPECIAL SERVICES Reduced transactions costs Maturity intermediation Transmission of monetary policy.
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