Professional Documents
Culture Documents
Intermediaries Special?
Objectives:
Explain the special role of FIs in the financial
system and the functions they provide.
Explain why the various FIs receive special
regulatory attention.
Regulations governing the FIs
An overview of the financial system
Without FIs
Households Corporations
(net savers) (net borrowers)
Cash
Information costs>High monitoring cost
Less liquidity> Better to hold cash
Substantial price risk> Sale price might be lower than
purchase price
WITHOUT FIS: LOW LEVEL OF FUND FLOWS
With FIs
FI
(Brokers)
Households Corporations
Functions of FIs
Brokerage function
Acting as an agent for investors:e.g. Merrill
Lynch
Reduce cost of trading through economies of
scale
Encourages higher rate of savings>Reducing
transaction and information cost
Asset transformer:
Purchase primary securities by selling financial
claims to households
These secondary securities often more
marketable>Deposits, insurance policies
McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-6
Specialness of FIs
Avoiding Failures
Nature of Regulations/Controls
Financial
System
Financial Instruments
Financial Institutions
Banking Non-Bank
Institutions Institutions
Financial Markets
Where financial instruments are bought and sold
Two types: Money market and Capital market
markets
Non-Security: Regulator> Bangladesh Bank