4.4.1 Roles of financial markets
FM: A financial market is any exchange that facilitates the trading of financial
institutes e.g. cash, bonds and stocks
To facilitate saving
To lend to businesses and individuals
To facilitate the exchange of goods and services (銀行卡,轉帳…)
To provide forward markets in currencies and commodities
(pay for agree price today and deliver the good in the future to avoid volatile price)
To provide a market for equities (=selling shares/IPO)
Why is FM important? (Government, consumer, firms)
1) Encourage Investment (Harrod Domar model) Allow
2) Encourage consumption through borrowing (C is 60% of GDP) economic
growth
3) Allow government to issue bonds and repay its debts
1.4.2 Market failure in financial sector
The FM can create a systematic risk = Knock on effect for other banks and savers lose
lots of money….. decrease economy growth
(When one firm fail, other fail becoz savers lack confidence in banks everyone takes out their money
complete systematic failure economic downturn)
Types:
Moral hazard
Asymmetric information
Speculation
Market rigging
Externalities
a) Consideration of:
Moral hazard
(Bailed out by government or future tax payers if anything gone
wrong//everyone will be getting money from the bank carnage!!!)
E.g. bailing out RBS
,
FM: A financial market is any exchange that facilitates the trading of financial
institutes e.g. cash, bonds and stocks
To facilitate saving
To lend to businesses and individuals
To facilitate the exchange of goods and services (銀行卡,轉帳…)
To provide forward markets in currencies and commodities
(pay for agree price today and deliver the good in the future to avoid volatile price)
To provide a market for equities (=selling shares/IPO)
Why is FM important? (Government, consumer, firms)
1) Encourage Investment (Harrod Domar model) Allow
2) Encourage consumption through borrowing (C is 60% of GDP) economic
growth
3) Allow government to issue bonds and repay its debts
1.4.2 Market failure in financial sector
The FM can create a systematic risk = Knock on effect for other banks and savers lose
lots of money….. decrease economy growth
(When one firm fail, other fail becoz savers lack confidence in banks everyone takes out their money
complete systematic failure economic downturn)
Types:
Moral hazard
Asymmetric information
Speculation
Market rigging
Externalities
a) Consideration of:
Moral hazard
(Bailed out by government or future tax payers if anything gone
wrong//everyone will be getting money from the bank carnage!!!)
E.g. bailing out RBS
,
