OVERVIEW OF MARKET PARTICIPANTS AND FINANCIAL INNOVATION CHAPTER 2 OVERVIEW OF MARKET PARTICIPANTS AND FINANCIAL INNOVATION

Issuers and Investors Classification of Entities; Central governments Agencies of central governments Municipalities Supranational Organizations Non-financial businesses Financial enterprices Households

Services that are provided by financial institutions Transform fin. assets acquired into assets that are more attractive to the public. (Fin. Intermediaries) Exchange fin. Assets on the behalf of others (Brokers) Exchange fin. Assets for their own. (Dealers) Assist in the creation of fin. assets for their customers and then sell these fin. assets to others.(underwriting) Provide inv. advices Provide portfolio management

Types of Fin. Intermediaries; Depository Institutions Commercial banks, Saving and loan associations, Saving banks, Credit unions Non-depository Institutions Insurance companies, Pension funds, Finance companies

Role of Financial Intermediaries Transforming of fin. Assets that are less desirable into other fin. Assets which are more widely preferred by public Providing maturity intermediation, Risk reduction via diversification, Reducing the cost of contraction and information processing, Providing a payments mechanism.

Overvıew of Asset and Liability Management of Financial Institutions Spread: Difference btw the returns on assets and costs of funds of the depository institutions. Positive spread.

Nature of Liabilities Liability Type Amount of Cash Outlay Timing of Cash Outlay Type I Known Type II Uncertain Type III Type IV

Financial Innovation Categorizations of Financial Innovation; Market-broadening Instruments Risk management instruments, Arbitraging instruments

Motivation for Financial Innovation Increased volatility of interst rates, inflation, equity prices, exchange rates. Advances in computer&telecomminication technologies. Greater sophistication and educational training among professional market participants. Financial intermediary competition. Incentives to get around existing regulation and tax laws. Changing global patterns of financial wealth

Asset Securitization It involves tha collection or pooling of loans and sale of securities backed by those loans. It means more than one institution may be involved in lending capital.

Consider the loans for the purchase of automobiles. (1) A commercial bank originates automobile loans. (2) The com. Bank issues securities backed by these loans (3) The com. Bank obtains credit risk insurance for the pool of loans from a private insurance company.

(4) The com. Bank sells the right to service the loans to another company that specializes in the serving of loans. (5) The com. Bank uses the services of a securities firm to distribute the securities to individual and institutional investors.