BANKING

AND
FINANCIAL
INSTITUTION
 1 2 3 4
Lesson 1. Lesson 2. Lesson 3. Lesson 4.
The Economics of Depository Institution: Financial Industry Structure Regulating the Financial
Financial Intermediation Bank Management System

COURSE OUTLINE

BANKING AND FINANCIAL INSTITUTION 2

THE ECONOMICS OF FINANCIAL INTERMEDIATION
FINANCIAL INSTITUTION
 FUNCTION OF
FINANCIAL
INSTITUTIONS

Pooling the resources

Provide Safekeeping

Suppling Liquidity

Diversification

Collecting Information

BANKING AND FINANCIAL INSTITUTION 4

 THE ECONOMICS OF FINANCIAL INTERMEDIATION
The Role of Financial Intermediaries
Pooling the resources of small savers
- Accepting small deposits to make large loans for those who needed
funds

Provide safekeeping, Payment system and Accounting

- The banks provide ways to access the payment systems and
reduces financial transactions

Supplying liquidity
- Offers ability to transform assets into money at relatively low cost.
BANKING AND FINANCIAL INSTITUTION 5
 THE ECONOMICS OF FINANCIAL INTERMEDIATION
The Role of Financial Intermediaries
Diversifying Risk
- Providing investors with the ability to diversify small investments
and provide low cost ways to diversification of investment.

Collecting and Processing Information

- Generating large amount of standardized financial information to
reduce information problems.

BANKING AND FINANCIAL INSTITUTION 6

 THE ECONOMICS OF FINANCIAL INTERMEDIATION
Information Asymmetries and Information Cost
Asymmetric Information
- A gap of knowledge between lenders and borrowers

Adverse Selection
- Arising before the transaction occurs

Moral Hazard
- Occurs after the transaction

BANKING AND FINANCIAL INSTITUTION 7

 NEGATIVE CONSEQUENCE OF INFORMATION
Adverse Selection Moral Hazard
- Lenders can’t tell whether
- Lenders can’t borrowers will do what
distinguish good from bad they claim
credits risk
Solutions: Solutions:
- Government-required - Requiring reports to
disclosure owners
- Private collection of - Requiring investment
information substantial resources
- Pledging collateral to - Restrict borrowers can do
insured to the borrowed funds
- Requiring borrowers to
invest substantial resources
BANKING AND FINANCIAL INSTITUTION 8
 TWO WAYS OF DISCLOSURE
Disclosure of Information
Government-required disclosure
(i) information that needs to disclosed required by
law, regulations or legal process
(ii) Rules and regulations of any securities exchange
on which either party’s securities are traded and
regulatory body over such securities exchange
(iii) Any order of the court

Private collection and Production of

Information – Any entity can collect or hold data or
information and release to the public any information
to provide professional information
BANKING AND FINANCIAL INSTITUTION 9
 SCREENING AND MONITORING
Reducing Adverse Selection
- Financial institutions collect information of a
borrower thru applications or credit reports.
- Noting the patterns of deposits and withdrawals
from the account of the borrowers and the use of
credit card
- The information they collect is easy to
protect and use.
- Use to screen clients and reduce the cost of
adverse selection

BANKING AND FINANCIAL INSTITUTION 10

 SCREENING AND MONITORING
Reducing Moral Hazard
- Financial institutions address the risk that
borrowers might take the money and run.
- Financial institutions monitor the activities of the
firm.
- Some financial institutions called a different
firm to do the monitoring that specializing in
monitoring.
- Use to guard against moral hazard and ensure
the best possible of success.

BANKING AND FINANCIAL INSTITUTION 11

 DEPOSITORY INSTITUTION
BANK AND BANK MANAGEMENT
 BANKING AS BUSINESS
- Business that provides the accounting and record
keeping services that track the balances of the
accounts.

- Provide access to the payment system, allowing to

convert account balances into cash or transfer to
other accounts.

Pools the savings of all small depositors and uses

them to make large loans.

Offers diversification services, buying and selling

financial instruments.
BANKING AND FINANCIAL INSTITUTION 13
TEACH A COURSE 14
 CURRENCY MARKET
Foreign Exchange Market (Forex)
OPTION

A term option refers to a financial instruments

that is based on the value of the underlying
assets. The holder is not required to buy or sell
the asset if they decide against it.

SWAP

A swap is a derivative contract through which two

parties exchange the cash flows or liabilities from
two different financial instruments.

FINANCIAL MARKET 15
CREDIT MARKET
This market suggests a redistribution of spare
funds from those who have them to those who do
not have them. Unlike the investment market, the
credit market is more complex (it has a three-tier
structure) and has tighter requirements for
participants to fulfill their obligations.

CREDIT MARKET LEVEL

❑ Central Banks
❑ Commercial Banks
❑ Credit Union

FINANCIAL MARKET
16
CREDIT MARKET
Central Bank
Acts as a regulator. By means of loans, the
central bank regulates the money supply,
supports banks, facing temporary troubles, keeps
the liquidity of banking system and covers the
cash gaps.

A central bank is a financial institution given

privileged control over the production and
distribution of money and credit for a nation or a
group of nations.

FINANCIAL MARKET 17
CREDIT MARKET
Commercial Bank
Refers to a financial institution that
accepts deposits, offers checking
account services, makes various loans, and
offers basic financial products like certificates
of deposit (CDs) and savings accounts to
individuals and small businesses.

Commercial banks provide basic banking

services and products to the general public, both
individual consumers and small to midsize
businesses.

FINANCIAL MARKET 18
CREDIT MARKET
Credit Union
A credit union is a type of financial cooperative
that provides traditional banking services to their
members.

Credit unions follow a basic business model.

Members pool their money (technically, they are
buying shares in the cooperative) to provide
loans, demand deposit accounts, and other
financial products and services to each other. .

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FINANCIAL MARKET
 INSURANCE
MARKET
Is a type of contractual
institutions that acquire
funds at periodic intervals
on a contractual basis.

Insurance is a contract,
represented by a policy, in
which a policyholder
receives financial protection
or reimbursement against
losses from an insurance
company.

FINANCIAL MARKET 20
 INVESTMENT
MARKET
Is a marketplace where all
classification of investment
are ready to sell and buy.

Investment market is to
provide a place where
anyone can buy and sell
contractual agreement and
fractional ownership in a
publicly traded company.

FINANCIAL MARKET 21
 STOCK
MARKET
The stock market is where
investors connect to buy and
sell investments — most
commonly, stocks, which are
shares of ownership in a
public company.

The term "stock market"

often refers to one of the
major stock market indexes,

FINANCIAL MARKET 22
FINANCIAL MARKET 23
FINANCIAL MARKET 24
MARKET PARTICIPANTS
❑ Regulators - Establishments that don’t take direct part in transactions, but perform a
controlling function. The supervisory function is also carried out by the central bank and the state
government, but it can also be a separate institution.
❑ Financial Services Companies - These are institutions involved in organizational work:
currency, stock and commodity exchanges, brokers, underwriters, auditors, depositories,
registrars, clearing and consulting companies.
❑ Financial intermediaries -They are intermediaries involved in the capital distribution,
market regulation and supervision for the established rules compliance.
❑ Legal entities - The most extensive group of participants: companies engaged in the
placement of clients' pension savings, investment services, insurance companies, hedge funds,
trust management companies, brokers, dealers, individual lending organizations, companies
engaged in any type of financial activity, participating the in money turnover.
❑ Individuals - traders, speculators, individual asset managers, long-term investors, and just
ordinary people.

FINANCIAL MARKET 25
FUNCTION OF FINANCIAL MARKET
Facilitate efficient relationships between all market
participants, ranging from private individuals and
individual investors, to large institutional investors.
Supervise and regulate the processes held in the financial
system: regulation of the money supply, compliance
control for established rules by market participants,
licensing, development of legal provisions
Mobilize the capital and allocate it so that it is used most
efficiently and generates added value
Minimize risks, including fraud prevention (anti-money-
laundering). Ensure transparent pricing and avoiding price
manipulation.

Ensure privacy and transparency of the transactions made

Provide market liquidity and necessary information

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FINANCIAL MARKET
THANK YOU!