1. Copyright © 2002 Pearson Education, Inc. Slide 3-1 Purpose of the Financial System Transfer funds from savers to borrowers …from financiers to entrepreneurs. Savers are suppliers of funds. Borrowers are demanders of funds. Financial markets issue claims on borrowers … savers buy these claims directly. Financial intermediaries act as go-betweens … savers entrust their funds to intermediaries which, in turn, buy claims on borrowers.

2. Copyright © 2002 Pearson Education, Inc. Slide 3-2 Figure 3.1 Moving Funds Through the Financial System

3. Copyright © 2002 Pearson Education, Inc. Slide 3-3 Figure 3.2 Services Provided by the Financial System

4. Copyright © 2002 Pearson Education, Inc. Slide 3-4 Key Services Provided by the Financial System Risk sharing by allowing savers to hold many assets Liquidity, which is the ease with which an asset can be exchanged for money Information about borrowers and returns on financial assets Address asymmetric info problems Adverse Selection Moral Hazard

5. Copyright © 2002 Pearson Education, Inc. Slide 3-5 Financial Markets Primary markets are those in which newly issued claims are sold to initial buyers Private placements Secondary markets are those in which previously issued claims are resold. Risk-sharing Liquidity Information on returns and values

6. Copyright © 2002 Pearson Education, Inc. Slide 3-6 Types of Secondary Financial Markets Maturity: money and capital markets Trading places: auction and over-the- counter markets Settlement Cash market … immediate settlement Derivative markets …future settlement

7. Copyright © 2002 Pearson Education, Inc. Slide 3-7 Goals of Financial Regulation Provision of information Maintenance of financial stability Controlling the money supply Encouraging particular activities

8. Copyright © 2002 Pearson Education, Inc. Slide 3-8 Table 3.1 Effects of Regulation