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04) +Financial++Intermediation 27sept+22 With+summary
04) +Financial++Intermediation 27sept+22 With+summary
Veronique Lafon-Vinais
Pricing of
Foundations of
Financial Institutions Financial Regulations
Interest Rates
Assets
Stock Banking
DCF Sell Side Buy Side
Valuation Regulation
Traditional Asset
Basics of Commercial Monetary
Institutional Pricing
Interest Rates Banking Policy
Investors Models
Investment Alternative
Banking Investors
2
© Prof Veronique Lafon-Vinais – All Rights Reserved
Course Map
Overview
Financial Institutions
Financial Intermediation
Conflicts of Interest
Financial Institutions
Financial Intermediation
Conflicts of Interest
Issue checkable
Issue financial claims
deposits
Financial
Indirect Finance
Intermediaries
Surplus Shortage
of of
Funds Funds
Financial
Direct Finance
Markets
Dealers
Investment banks
Custodians
Trustees
Examples:
– Real estate broker: will put together a buyer and a seller and charge a fee
– Insurance broker: will find the “right” policy for his clients among various
possible insurance companies
Makes money from the difference (the spread) between the price at
which he buys the assets (bid) and the price at which he sells them (offer)
Market makers are dealers who post 2-way prices and “make markets”
thus providing liquidity
Examples:
– FX dealer
Classification of FIs
Dealer definition
Broker definition
Financial Institutions
Financial Intermediation
Conflicts of Interest
Money Money
Lenders Borrowers
Financial
Claim on
Surplus Intermediary Claim on Shortage
Financial
of Funds Intermediary Borrower of Funds
(Indirect (Primary
Securities) Securities)
More important source of finance than securities markets The time &
money spent on
Reduce transactions costs and asymmetric information carrying out
financial
– Reduce transactions costs by developing expertise and taking transactions
advantage of economies of scale
?
– Low transaction costs increase profits and allow some
intermediaries to provide liquidity services
The reduction in
• Checking accounts that enable them to pay their bills easily transaction costs
• Depositors can earn interest on checking and savings accounts per dollar of
transaction as the
and yet still convert them into goods and services whenever
size (scale) of
necessary transaction
increases
Lenders Borrowers
• Households • Corporations
• Corporations Deposits Bank Loans
• Households
• Other FIs • Other FIs
Lenders
• Households Borrowers
Contractual Equities &
• Corporations Savings Insurer Securities
• Corporations
• Other FIs • Other FIs
Monitoring Costs
– Collect information and monitor firms activities at a lower cost than individual
actors due to economies of scale
Denomination Intermediation
– By pooling their savings, financial intermediaries allow small investors to buy
assets which would have been inaccessible due to large minimum investment
size (e.g. bonds)
Credit Allocation
– Financial intermediaries are the major and sometimes only source of financing for particular
sectors of the economy
Payment Services
– The efficiency with which the depository institutions provide payment services directly
benefits the economy
– No
– No
Financial Institutions
Financial Intermediation
Conflicts of Interest
Universal banking
“I try not to break the rules, but merely to
….. test their elasticity”
Bill Veeck as cited in FT 24/8/07 article “Derivatives Dodges”
Supervisory Oversight
Separation of Functions
Insider trading
……
https://www.youtube.com/watch?v=QeQHYu0AY5c
Article link
https://www.fitchratings.com/research/banks/apac-bank-regulators-lean-
towards-conservative-crypto-approaches-15-09-2022
Sarbanes-Oxley