Why Are Financial Intermediaries Special? Chapter 1 © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin.

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Presentation transcript:

Why Are Financial Intermediaries Special? Chapter 1 © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin

1-2 Transactions without Financial Institutions Corporations (net borrowers) Households (net savers) Cash Equity & Debt Primary difference is direct transacting versus transformation Example of direct below:

1-3 With FIs Cash HouseholdsCorporations Equity & Debt FI (Brokers) FI (Asset Transformers) Deposits/Insurance Policies Cash

1-4 FIs are Middlemen!  Why should they exist? Reduce information costs Spread of risk Economies of scale Maturity intermediation Payment services

1-5 Types of FIs  Depository institutions  Insurance Companies  Pension Funds  Investment Banks  Mutual Funds  Finance Companies

1-6 Regulation of FIs  Safety + soundness  Monetary policy  Credit allocation  Consumer protection  Investor protection  Entry  Regulation is not costless

1-7 Regulation  Safety and soundness regulation: Regulations to increase diversification  No more than 10 percent of equity to single borrower Minimum capital requirements Guaranty funds:  Deposit insurance fund (DIF):  Securities Investors Protection Fund (SIPC) Monitoring and surveillance.  FDIC monitors and regulates DIF participants.

1-8 Additional Terms  Redlining  Negative externality  Disintermediation  Liquidity  Solvency  Information costs  Payment Services

1-9 Trends in Assets Held by FIs

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