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AK/ECON 3430 3.0 A Money, Banking and Finance A Fall 2014

AK/ECON 3430 3.0 A Money, Banking and Finance A Fall 2014. Prof. Brenda Spotton Visano November 3, 2014. Primary Financial Services Needs. Transfer purchasing power in a period of time to facilitate Exchange of Goods and Services

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AK/ECON 3430 3.0 A Money, Banking and Finance A Fall 2014

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  1. AK/ECON 3430 3.0 AMoney, Banking and Finance AFall 2014 Prof. Brenda SpottonVisano November 3, 2014

  2. Primary Financial Services Needs • Transfer purchasing power in a period of time to facilitate Exchange of Goods and Services • Transfer purchasing power over time from Savers to Users of Funds (Borrowers and Investors)

  3. Secondary Financial Services Needs • Develop and maintain payments system • Amass or “pool” funds from small savers to provide larger amounts to (1) fund bigger loans and larger investment projects, and (2) provide small savers opportunity for portfolio diversification • Collect and process information - Specialize to reduce transactions costs

  4. Recall - Limits of Individual Financial Self-Sufficiency • When you need to borrow funds, do you issue marketable bonds? Why not? • Do you make all your own arrangements for your retirement? • Should you alone be responsible for costs of property damage or illness? • Are you wealthy enough to adequately diversify your portfolio? • Would having insurance for something change your insured behaviour? • As a lender, would you lend to anyone who asks to borrow? Why/why not?

  5. Financial Specialists: Broker or Intermediary? • What is the difference between a Broker and an Intermediary? • What is the economic benefit of a Financial Broker? What gaps in the delivery of financial contracts and services could a Broker fill? • What is the economic benefit of a Financial Intermediary? What gaps in the delivery of financial contracts and services could an Intermediary fill? • Should Financial Markets and Intermediaries specialize in serving a subset of the economy or become “universal” suppliers of financial services?

  6. Markets and Brokers or Intermediaries? • Are there economics of scale or scope in collection and processing of information? • How best to structure the Financial Services industry and the financial firms to gain the economic benefits of providing a means of payment? …pooling savings? …increasing liquidity? …diversifying risk? …resolving adverse selection? …minimizing moral hazard in equity financing?

  7. Household Financing Needs

  8. Non-financial Businesses Financing Needs

  9. Financial Intermediaries (FIs) as Portfolio Managers FIs manage a portfolio of financial assets and financial liabilities: • Issue liabilities against themselves to acquire income earning assets • Can and do transform the terms and conditions of the contract in the ultimate transfer of funds from savers to users of funds (i.e., borrowers, investors)

  10. Problem #1: The Need for a Payments System • Advantages and Disadvantages of Rocks? …Specie (e.g., Gold)? … Government Legal Tender/Currency? … Bitcoin? • Create a financial specialist firm that will store the means of payment – do the accounting, provide safe-keeping (currency, gold) • How to earn a profit? Fees? or… Lend out excess “money” – “buy” interest generating assets – which assets to acquire/which loans to make as a prudent portfolio manager? What are the risks? How much to loan out? • If deposits can be exchanged directly then deposits act as “money” • Deposit creation process allows for the creation more “money” to be created by this firm

  11. Problem #2: Small Savers’ Need for Retirement Financing • Limits of Individual Self-sufficiency in Saving for retirement • Create a financial specialist who will do the accounting, pool savings, diversify the portfolio over income-earning assets, and distribute asset income to retirees • For Employers and Employees - offer Defined Benefit or Defined Contribution Pension Plans - which assets to acquire as a prudent pension portfolio manager? What are the risks to the Employee? …to the Employer?

  12. Economic Contributions of FIs - Asset Transformation • Borrow from many people in small denominations, lend in larger amounts to fewer people • Borrow short term, lend long term • Borrow in liquid debt instruments, lend on illiquid contracts • IF these opportunities encourage savings and encourage investment THEN FIs promote economic growth

  13. Economic Contributions of FIs as Information Providers • Offer bookkeeping services to clients • Collect and assess information on potential investment or lender risks • Create standardized ways of reporting information

  14. Canada’s Solution to Household Financing Needs

  15. Canada’s Solution to Non-financial Businesses Financing Needs

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