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Financial Institutions and Markets

Professor Lal C. Chugh

Financial Institutions and Markets

Economic Units

Households

Business Firms

Governments [ local, state, central]

Foreign Sector

Financial Institutions and Markets

Deficit Spending Units (DSU )

Expenditures exceed Receipts; Cash

outflow is greater than cash inflow, hence need for funds.

Surplus Spending Units (SSU)

Cash inflow exceeds cash outflow Name DSU’s and SSU’s

Transfer Of Funds from Surplus to Deficit Spending Units

Surplus Spending Units

HouseholdsBusiness FirmsGovernments

Foreign Sector

Funds Financial Markets

Funds

Fu

nd

s

Financial Intermediaries

Deficit Spending Units

HouseholdsBusiness FirmsGovernments

Foreign Sector

Indirect Financing

Direct Financing

Fund

sFundsFunds

Financial Institutions and Markets

Direct Financing:

Loan from friends & families (Angels), Venture Capital; SSU’s buy stocks and bonds of new companies in the markets

Indirect Finance:

SSU’s deposit funds in FI’s and DSU’s get funds from FI’s

Financial Institutions and Markets

Financial Intermediaries: 1. Deposit Type Banks, Cooperative Credit Institutions, Savings Institutions for Housing, Mortgage Banks 2. Contractual Type Life Insurance, Casualty Insurance, Pension Funds

Financial Institutions and Markets

Financial Intermediaries continued:

3. Mutual Funds—Investment Companies

Stock Funds, Bond Funds, Money

Market Funds; “Net Asset Value”, Calculation of

NAV ; Open-ended ; Closed ended

4. Non Bank Financial Institutions

Consumer and Business Loans

Financial Institutions and Markets

All these FI’s have different types of assets and liabilities. For Example:

1. Banks have short term liabilities and

relatively short term assets

2. Life Insurance companies have long

term liabilities and long term assets

3. Investment Funds—according to goals

Financial Institutions and Markets

Role of FI’s---Indirect Finance 1. Denomination Intermediation Savers save in small amounts, Borrowers borrow in large amounts 2. Maturity Intermediation--liquidity SSU’s want short term assets, DSU’s want funds for a longer time

Financial Institutions and Markets

Role of FI’s—Indirect Finance: 3. Search Costs for DSU’s and SSU’s reduced 4. Diversification of Risk Banks reduce credit risk Mutual Funds reduce price risk Insurance companies reduce risk by pooling

Financial Institutions and Markets

Role of FI’s—Indirect Finance: 5. Currency Exchange Facilitate international trade and investments 6. Advice on risk reduction strategies

7. Providing guarantees to reduce cost of financing

Financial Institutions and Markets

Financial Markets:

Stock Market

1.Existing stocks are traded— “Secondary”

Market

2. New Shares of old firms, or shares of

New Firms-- Initial Public Offering (IPO’s);

Role of Investment Bankers

Financial Institutions and Markets

Financial Markets:

Bond Markets

Bond is an instrument of loan to

firm/government. It has a coupon and a

face value. Bonds are traded.

Foreign Exchange Market

Currencies are traded

Financial Institutions and Markets

Face Value1000 $

BOND

Coupon 10% semi-annual

50$ each half year is paid by borrower

Financial Marketsin Romania

Bucharest Stock Exchange (BSE)

Trading of stocks ---Joint Stock Companies; Some IPO’s Also Futures on Stock Index Also Bond Trading “BET” index of 10 companies; BET-C Index for all companies; Also Futures on shares and currency

Financial Markets in Romania

Sibiu Monetary, Financial and Commodities Exchange “BMFMS” “SIBEX” Trading in Futures/Options What is “Futures”? What is “Option”? Currency, Commodities, Shares and Indexes Both are regulated by the Securities

Commission (CNVM)

Financial Markets

Municipality can issue bonds backed by its revenues—several have issued and are listed on BSE. Municipal Bonds

Mortgage Bonds—backed by the mortgages

Financial Institutions in Romania

Financial Sector has been expanding since 2004

Ratio of FI’s assets/GDP in 2004=44%; Now over 75%

Banks are the most important in terms of assets. Non bank FI’s and Insurance Firms;

Financial Institutions in Romania

Foreign Investment into the financial sector Private Capital in Banks; Govt. Capital—only

a few (2). Foreign Banks –Greece, Netherland and

Austria---have a substantial ownership in the banking industry

Foreign Short term Deposits in foreign currency in the Romanian banking industry

Financial Institutions in Romania

Impact of Global Crisis ? If Foreign Banks reduce support to banking

sector, What are the consequences?1. Banks may not be able to make loans to

companies and households. The economy suffers--Bad Debts increase.

2. Banks may not have sufficient equity to meet standards and maintain solvency

Financial Institutions in Romania

But: Vienna Initiative—Parent Banks (9) have

made a commitment to continue to support Romanian banks and branches.

IMF/EU loan provides a cushion. Conditions: Fiscal Austerity—Reduce Deficit—Pension

Reform, Cuts in Govt. Personnel, Cuts in Wages

Financial Institutions in Romania

Progress is being made in that area. Banks are in a stronger position Solvency Ratio; Deposit Insurance; Stress Tests Romanian Economy is expected to grow faster [1.3%

in 2010 instead of 0.3%] Both IMF and EU have made favorable reviews.

Funds have been released. Vigilance on the deficit “Deficit Target” likely to be

met

Thank You

Mulţumesc!