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    Financial System

    Uploaded by

    jenneaalega
    Financial markets

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Financial System

    Uploaded by

    jenneaalega
    1 views12 pages
    Financial markets

    Original Title

    FINANCIAL SYSTEM

    Copyright

    © © All Rights Reserved

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    PDF, TXT or read online from Scribd

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    Financial markets

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    1 views12 pages

    Financial System

    Uploaded by

    jenneaalega
    Financial markets

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 12

    FINANCIAL SYSTEM

    FINANCIAL SYTEM
    • It shows the relationship with respect to the flow of funds and
    from households, governments, business firms, and foreigners,
    as well as the financial infrastructure.
    KEY COMPONENTS OF THE FINANCIAL SYSTEM
    • Financial instruments
    • Financial markets and financial institutions
    • The Central Bank and Other Financial Regulators
    FUNCTIONS OF THE FINANCIAL SYSTEM
    • The main task of the financial system is to
    channel funds from sectors that have a surplus
    to sectors that have a shortage of funds.
    SERVICES FINANCIAL SYSTEM PROVIDE
    • Risk Sharing
    • Liquidity
    • Information
    ASYMMETRIC INFORMATION
    • It describes the situation in which one party to an economic
    transaction has better information than does the other party.
    PROBLEMS WITH ASYMMETRIC INFORMATION
    • Adverse Selection
    • This is the problem investors experience in distinguishing low-risk
    borrowers from high-risk borrowers before making an investment.
    • Moral Hazard
    • This is the problem investors experience in verifying gthat borwwoers
    are using their funds as intended.
    NATURE AND IMPACT OF TRANSACTION AND INFORMATION
    COSTS
    • Transaction Costs
    • Information Costs
    HOW TO REDUCE ADVERSE SELECTION
    • Requiring borrowers to disclose the financial performance and
    financial position
    • Collecting information on firms and selling that information to
    investors
    • Convincing lenders to require borrowers to pledge some of
    their assets as collateral which the lender can claim of the
    borrower defaults.
    HOW FINANCIAL INTERMEDIARIES REDUCE MORAL HAZARD
    • Financial intermediaries can reduce moral hazard
    problems by adopting more stringent
    procedures in monitoring the borrower’s use of
    funds.
    • Specializing in monitoring borrowers
    • Imposing restrictive covenants
    HOW TO REDUCE TRANSACTION COSTS
    • Take advantage of economies of scale.
    • Take advantage of technology

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