Samenvatting
College samenvatting Financial History & Intermediation
- Instelling
- Tilburg University (UVT)
Samenvatting van alle hoorcolleges van Financial Intermediation
[Meer zien]Voorbeeld 4 van de 63 pagina's
Voorbeeld 4 van de 63 pagina's
In winkelwagengesponsord bericht van onze partner
Verkoper
Volgen
Voorbeeld van de inhoud
Notes Financial IntermediationModule 1 – Introduction to Financial Intermediation & Risks in Financial Intermediation
Plan
- What is financial intermediation?
- Financial intermediaries & information frictions
- Financial intermediaries & mismatch of needs
- Functions & features of financial intermediaries
- Financial intermediaries and growth
- Regulation of financial intermediaries
- Risk in financial intermediation
What is Financial Intermediation?
A person or a department between suppliers of funds and users of funds
Types of Intermediaries
- Depository institutions:
Commercial banks, savings institutions, credit unions
- Non-depository institutions
Finance companies
Securities brokerages & investment banks
Mutual funds, hedge funds, pension funds
Insurance companies
Why do we need intermediaries?
1. Mismatch of needs
- Direct financing can be unfeasible also because:
The timing of user’s investment does not match the liquidity needs of suppliers
(especially problematic if claims cannot be easily sold)
The risk of user’s investment does not match the risk appetite of suppliers
2. Information frictions
- It is difficult for suppliers of funds to:
Find the potential users of funds
Asses the feasibility of the projects that users want to invest in
Monitor the users of funds to make sure they don’t waste money
Financial Intermediaries & Information Frictions
Why are FI’s good at solving information frictions
- Economies of scale: FI’s can assess credit-worthiness of many users of funds and
monitor them using similar methods and tools, keeping internal records implies less
need for costly information collection in the future
- Advantage of concentration: A single FI has more incentives to monitor users of
funds than dispersed individuals
Example: Economies of Scale
, - Suppose that there are 5 borrowers with business plans in hospitality
- There are 5 people working in manufacturing sector with abundant savings, who
want to lend and each match with 1 borrower
- To understand the risk each lender has to analyse the business plan:
Need to learn about developments in the hospitality sector (1 week)
Need to apply the knowledge on the proposal (1 day)
- All lenders together spend a total of 5 weeks and 5 days on the analysis
FI would only need to spend 1 week and 5 days
Example: Advantage of Concentration
- Suppose that there is one borrower with a need for $100.000
- No single lender can lend as much must borrow from 100 individuals
If the borrower works hard, he repays with 100% probability
If the borrower doesn’t work hard, he repays with 50% probability
- Assume that if the borrower is not monitored, he doesn’t work hard
- To check whether the borrower works hard, a lender needs to pay 600$
- Does it make sense for a lender to monitor?
Expected payoff without monitoring: 50% * 1.000$ = 500$
Expected payoff with monitoring: 100% * 1.000$ - 600$ = 400$
- Now suppose the 100 lenders lend to a FI, who lends to the borrower
Expected payoff without monitoring: 50% * 100.000$ = 50.000$
Expected payoff with monitoring: 100% * 100.000$ - 600$ = 99.400$
What about interest rates?
- Notice that in the example we calculated the payoffs and not the profits of the
lenders
Profit = Payoff – Initial Investment
- Because we assumed that the interest rate is 0%, all profits are negative
- What is the interest rate needed, so that the lender makes no losses?
Find the interest rate at which the profits are equal to 0
This is the minimum interest rate required by the lender
FI & ex-ante Information Frictions
I. Before the contract:
- Information asymmetry between users and suppliers of funds can lead to adverse
selection
- FI’s screen users of funds:
Analyse their riskiness
Sort into different categories
Make loan conditions dependant on risk
II. After the contract:
- Users of funds can use them in a way that harms the suppliers
Put it into projects that give them personal gains
Take too much risk with their investments
Not work hard enough to succeed in the investment
- We call this moral hazard
, FI’s specialise in monitoring users of funds & can design contracts which allow
them to intervene
Example: issue short-term loans which require frequent refinancing, so that
without “passing” the bank’s monitoring the firm cannot continue operating
Assessment of Credit Risk
- Banks often perform the analysis themselves
Ask customer for proof of income, wealth, education, etc.
Study history of repayments of loans, taxes, etc.
- Other institutions also evaluate risks:
FICO in US is a customer credit scoring agency
Credit rating agencies for corporations and countries (S&P Global, Moody’s,
Fitch)
Financial Intermediaries & Mismatch of Needs
Why are FI’s good at solving the mismatch of needs?
- Diversification: FI’s satisfy liquidity needs & risk appetites at a lower cost
FI’s receive funds from many suppliers: Only some of them will have a liquidity
need (need to keep less reserves)
FI’s lend funds to many users: Less fluctuations in total value of these assets as
idiosyncratic risks are diversified
Satisfying Liquidity Needs: Diversified Funding Supply
- Users of funds typically can only repay after many years
- Suppliers of funds may have unexpected liquidity needs in the meantime
- FI’s intermediate funds of a large number and variety of suppliers
- Can estimate how many are likely to have liquidity needs & keep necessary cash to
pay them
Diversified Funding Supply (=sourcing from many suppliers) allows FI’s to transform
long maturity claims into very short-term maturity products
Example: Demand deposits by banks
Satisfying Risk Appetites: Diversified Assets
- Individual projects of users of funds are typically very risky
- Many suppliers of funding prefer to make safe investments
- FI’s can transform the risky claims against users of funds into safer assets held by the
suppliers, by:
Diversifying the allocation of funds: Value affected only by systematic risk
Monitoring the funding users
Designing claims with different risk profiles for various suppliers of funds
- But some of the risk remains and is often faced by the FI itself
Functions & Features of Financial Intermediaries
, FI solve the problems related to information frictions & mismatch of needs through their
two functions
1. Brokerage functions
Bring together transacting parties with matching needs
Collect information on both
Provide transaction services
FI’s advantage: Economies of Scale & Concentration lower screening costs =
information is cheaper
2. Asset transformation functions
Buy claims from users of funds
Design claims with different maturity & risk
Issue these claims to savers
FI’s advantage: Lower monitoring, liquidity and transaction costs, ability to
diversify risk
Brokerage function
- Transaction services: check-writing, buying/selling of securities
- Financial advice: advice on where to invest, portfolio management
- Screening and certification: bond ratings
- Origination: bank initiating a loan to a borrower
- Issuance: taking a security offer into the market
- Funding: bank making a loan
Asset transformation functions
- Monitoring: monitoring borrower’s compliance with loan covenants
- Management expertise: venture capitalist running a firm, hedge funds taking over
firms and introducing operational changes
- Guaranteeing: an insurance company providing insurance, bank providing letter of
credit to a firm
- Liquidity creation & claims transformation: bank making illiquid loans and
transforming them into liquid deposits
Transmission of Monetary Policy
- Monetary policy aims at keeping the value of money relatively constant
- Central banks conduct it by:
Open market operation: Selling/buying bonds to affect interest rates
Setting discount rates: Rates charged to FI’s borrowing form CB
Setting reserve requirements: Minimum % of liabilities set aside by FI
- Interaction with FI’s is key in this process
- FI’s transmit policy to users and suppliers of funds, affecting the relative price of
money = inflation
Payment Services
- High liquidity of deposits: they are accepted as means of transaction
- Most payments = direct transfer from one deposit account to another
- These transactions are cleared and enabled by FI’s
Other aspects:
Voordelen van het kopen van samenvattingen bij Stuvia op een rij:
Verzekerd van kwaliteit door reviews
Stuvia-klanten hebben meer dan 700.000 samenvattingen beoordeeld. Zo weet je zeker dat je de beste documenten koopt!
Snel en makkelijk kopen
Je betaalt supersnel en eenmalig met iDeal, creditcard of Stuvia-tegoed voor de samenvatting. Zonder lidmaatschap.
Focus op de essentie
Samenvattingen worden geschreven voor en door anderen. Daarom zijn de samenvattingen altijd betrouwbaar en actueel. Zo kom je snel tot de kern!
Veelgestelde vragen
Wat krijg ik als ik dit document koop?
Je krijgt een PDF, die direct beschikbaar is na je aankoop. Het gekochte document is altijd, overal en oneindig toegankelijk via je profiel.
Tevredenheidsgarantie: hoe werkt dat?
Onze tevredenheidsgarantie zorgt ervoor dat je altijd een studiedocument vindt dat goed bij je past. Je vult een formulier in en onze klantenservice regelt de rest.
Van wie koop ik deze samenvatting?
Stuvia is een marktplaats, je koop dit document dus niet van ons, maar van verkoper bramstopa. Stuvia faciliteert de betaling aan de verkoper.
Zit ik meteen vast aan een abonnement?
Nee, je koopt alleen deze samenvatting voor €4,99. Je zit daarna nergens aan vast.
Is Stuvia te vertrouwen?
4,6 sterren op Google & Trustpilot (+1000 reviews)
Afgelopen 30 dagen zijn er 53920 samenvattingen verkocht
Opgericht in 2010, al 14 jaar dé plek om samenvattingen te kopen