1-2 Transactions without Financial Institutions Corporations (net borrowers) Households (net savers) Cash Equity & Debt Primary difference is direct transacting versus transformation Example of direct below:
1-3 With FIs Cash HouseholdsCorporations Equity & Debt FI (Brokers) FI (Asset Transformers) Deposits/Insurance Policies Cash
1-4 FIs are Middlemen! Why should they exist? Reduce information costs Spread of risk Economies of scale Maturity intermediation Payment services
1-6 Regulation of FIs Safety + soundness Monetary policy Credit allocation Consumer protection Investor protection Entry Regulation is not costless
1-7 Regulation Safety and soundness regulation: Regulations to increase diversification No more than 10 percent of equity to single borrower Minimum capital requirements Guaranty funds: Deposit insurance fund (DIF): Securities Investors Protection Fund (SIPC) Monitoring and surveillance. FDIC monitors and regulates DIF participants.