Perform the essential function of channeling funds from economic players that have saved surplus funds to those that have a shortage of funds Promotes economic efficiency by producing an efficient allocation of capital, which increases production Directly improve the well-being of consumers by allowing them to time purchases better | Chapter 2 An Overview of the Financial System Function of Financial Markets Perform the essential function of channeling funds from economic players that have saved surplus funds to those that have a shortage of funds Promotes economic efficiency by producing an efficient allocation of capital, which increases production Directly improve the well-being of consumers by allowing them to time purchases better Structure of Financial Markets Debt and Equity Markets Primary and Secondary Markets Investment Banks underwrite securities in primary markets Brokers and dealers work in secondary markets Exchanges and Over-the-Counter (OTC) Markets Money and Capital Markets Money markets deal in short-term debt instruments (= 1 year(s)) Internationalization of Financial Markets Foreign Bonds—sold in a foreign country and denominated in that country’s currency Eurobond—bond denominated in a currency other than that of | Chapter 2 An Overview of the Financial System Function of Financial Markets Perform the essential function of channeling funds from economic players that have saved surplus funds to those that have a shortage of funds Promotes economic efficiency by producing an efficient allocation of capital, which increases production Directly improve the well-being of consumers by allowing them to time purchases better Structure of Financial Markets Debt and Equity Markets Primary and Secondary Markets Investment Banks underwrite securities in primary markets Brokers and dealers work in secondary markets Exchanges and Over-the-Counter (OTC) Markets Money and Capital Markets Money markets deal in short-term debt instruments (= 1 year(s)) Internationalization of Financial Markets Foreign Bonds—sold in a foreign country and denominated in that country’s currency Eurobond—bond denominated in a currency other than that of the country in which it is sold Eurocurrencies—foreign currencies deposited in banks outside the home country Eurodollars—. dollars deposited in foreign banks outside the . or in foreign branches of . banks World Stock Markets Function of Financial Intermediaries: Indirect Finance Lower transaction costs Economies of scale Liquidity services (such as checking acct & saving acct with interest on these acct, convenience: use anywhere). Reduce Risk Risk Sharing (Asset Transformation) --> borrowers not pay back the money borrow. Diversification (cho vay nhiều người, nhiều ngành ) Asymmetric Information Adverse Selection (before the transaction: trước khi có quyết định cho vay)—more likely to select risky borrower ==> don't make loan. Moral Hazard (after the transaction: sau khi đã cho vay)—less likely borrower will repay loan (ví dụ như nguyên nhân là do sử dụng vốn sai mục đích) Regulation of the Financial System To increase the information available to investors: Reduce adverse selection and moral hazard problems Reduce insider trading To ensure the soundness of financial intermediaries: Restrictions on entry (hạn chế sự ra đời của các banks) Disclosure (information must be available to public) Restrictions on Assets and Activities Deposit Insurance Limits on Competition Restrictions on Interest Rates
