1. An Overview of the Financial System
Chapter 2
An Overview of the Financial System

2. 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
Direct finance(直接金融): borrowers borrow funds directly from lenders in financial markets by selling them securities.

3. Function of Financial Markets
Promotes economic efficiency by producing an efficient allocation of capital, which increases production
Directly improve the well-being (福祉)of consumers by allowing them to time purchases better-選擇最佳消費時點。

4. FIGURE 1 Flows of Funds Through the Financial System

5. Structure of Financial Markets
Debt and Equity Markets
Debt(債務) instruments (maturity)
Equities(股權) (dividends)
Primary(初級) and Secondary(次級) Markets
Investment Banks underwrite(承銷) securities in primary markets
Brokers(經紀商) and dealers(交易商) work in secondary markets

6. Structure of Financial Markets
Exchanges and Over-the-Counter (OTC) Markets(集中市場與店頭市場)
Exchanges: NYSE, Chicago Board of Trade
OTC Markets: Foreign exchange, Federal funds.
Money and Capital Markets
Money markets deal in short-term debt instruments
Capital markets deal in longer-term debt and equity instruments.

7. Table 1 Principal Money Market Instruments

8. Table 2 Principal Capital Market Instruments

9. Internationalization of Financial Markets (Glossary)
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(歐洲美元): U.S. dollars deposited in foreign banks outside the U.S. or in foreign branches of U.S. banks
World Stock Markets
Help finance federal government also

10. Function of Financial Intermediaries(金融中介): Indirect Finance
Lower transaction costs (time and money spent in carrying out financial transactions).
Economies of scale(規模經濟)
Liquidity services(流動性服務)
Reduce the exposure of investors to risk
Risk Sharing(風險分攤) (Asset Transformation)
Diversification(資產分散)

11. Function of Financial Intermediaries: Indirect Finance
Deal with asymmetric information(資訊不對稱) problems
(before the transaction) Adverse Selection(相反選擇): try to avoid selecting the risky borrower.
Gather information about potential borrower.
(after the transaction) Moral Hazard(道德危險): ensure borrower will not engage in activities that will prevent him/her to repay the loan.
Sign a contract with restrictive covenants.

12. Function of Financial Intermediaries: Indirect Finance
Conclusion:
Financial intermediaries allow “small” savers and borrowers to benefit from the existence of financial markets.

13. Table 3 Primary Assets and Liabilities of Financial Intermediaries

14. Table 4 Principal Financial Intermediaries and Value of Their Assets

15. Regulation(規範) of the Financial System
To increase the information available to investors:
Reduce adverse selection and moral hazard problems
Reduce insider trading (SEC).

16. Regulation of the Financial System
To ensure the soundness of financial intermediaries:
Restrictions on entry(進入障礙) (chartering process).
Disclosure of information(資訊揭漏).
Restrictions on Assets and Activities (control holding of risky assets).
Deposit Insurance (avoid bank runs(擠兌)).
Limits on Competition (mostly in the past):
Branching
Restrictions on Interest Rates

17. Table 5 Principal Regulatory Agencies of the U.S. Financial System

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