CAPITAL MARKETS. OVERVIEW OF MARKET PARTICIPANTS AND FINANCIAL INNOVATION. GROUP MEMBERS. KEZBAN ŞAHİN 060207013 ZEYNEP ŞAHİNER 060207028 ÖZNUR UZLAŞAN 060207048 GİZEM VERGİLİ 070207041. CONTENTS. ISSUERS AND INVESTORS
OVERVIEW OF MARKET PARTICIPANTS AND FINANCIAL INNOVATION
These entities borrow funds in the debt market and raise funds in the equity market.
Nonfinancial businesses are the form of three category; reasons.Debt obligations issued by central governments carry the full faith and credit of the borrowing government.
In the last category businesses produce same products or provide the same services as corporations,but are not incorporated.Financial businesses more popularly referred to as financial institutions provide one or more of the following services.
II. This economic function of financial intermediaries-transforming more risky assets into less risky ones-is called diversification.Even though individual investors can do it on their own,they may not be able to to it as cost effectively as a financial intermediary,depending on the amount of funds they want to invest.Attaining cost effective diversification in order to reduce risk by purchasing the financial assets of a financial intermediary is an important economic benefit for financial markets.
Investorspurchasingfinancialassetsmustdevelopskillsnecessarytoevaluate an investment. Thoseskillsaredeveloped, investors can applythemwhenanalyzingspecificfinancialassetsforpurchase.
Investorswhowanttomake a loanto a consumerorbusinessneedtowriteloancontract. Althoughsomepeoplemayenjoydevotingleisure time tothistask, most of us findleisure time to be in shortsupplyandcompensationforsacrificing it. The form of compensationcould be a higherreturnobtainedfrom an investment.
In addition to the opportunity cost of time to process the information about the financial asset, the cost of this information must also be considered. All these costs are information processing costs.
The costs of writing loan contracts are referred to as contracting costs. Another dimension to contracting costs is the cost of enforcing terms of loan agreement.
We have two examples of financial intermediaries as commercial bank and investment company.
So that, economies of scale can be realized in contracting and processing information because of amount of funds managed by financial intermediaries.
The lower costs increase to the benefit of investor who purchases asset and the issuer of financial assets.
The previous three economic functions may not be immediately obvious. This last one should be. Most transactions made today are not with cash. Payments are made using checks, credit cards, debit cards and electronic transfers of funds. Financial intermediaries provide these methods for making payments.
At one time, noncash payments were restricted to checks. Payment by credit card was also at one time the exclusive domain of commercial banks, but now other depository institutions offer this service. Debit cards are offered by various financial intermediaries.
A debit card differs from a credit card in that a bill sent to credit cardholder periodically (usually once a month) requests payment for transactions made in the past. With a debit card, funds are immediately withdrawn from the purchaser’s account at time transaction takes place.
The ability to make payments without cash is critical for financial market. In short, depository institutions transform assets that cannot be used to make payments into other assets.
To understand why managers of financial institutions invest in particular types of financial assets and types of investment strategies employed. It is necessary to have a general information of asset/liability problem.
For example, depository institutions seek to generate income by difference between return that they earn on assets and cost of their funds. This difference is referred to as spread.
TYPE I LIABILITY INSTITUTIONS
Both amount and timing are known. For example, depository institutions know amount that they are committed to pay on maturity date of a fixed rate deposit, the depositor does not withdraw funds prior to the maturity date.
TYPE II LIABILITY
The amount of cash outlay is known, but timing of cash outlay is uncertain. Life insurance policy can be an example for this liability. The most of basic many types of life insurance policy provides that, for annual premium, this company agrees to make a specified payment to beneficiaries upon the death of insured.
TYPE III LIABILITY INSTITUTIONS
Timing is known, but amount is uncertain, such as when a financial institution has issued an obligation in which the interest rate adjust based on some interest rate benchmark.
Depository institutions, for example, issue liabilities called certificates of deposit with a stated maturity. The interest rate paid need not to be fixed over life of deposit but may fluctuate.
TYPE IV LIABILITY INSTITUTIONS
Both amount and timing are uncertain. Home insurance policy is an example. Whenever damage is done to an insured asset, the amount of payment that must be made is uncertain.
1. Financial Activity Regulation
2. Disclosure Regulation
3. Regulation of Financial
4. Regulation of Foreign
1. DISCLOSURE REGULATION: result of financial crises that have occurred at various times.Most regulatory mechanisms are the products of the stock market crash of 1929 and the Great Depression in the 1930s. It requires issuers of securities to make public a large amount of financial information to actual and potential investors.The standard justification for disclosure rules is that the managers of the issuing firm have more information about the financial health and future of the firm. The cause of market failure here, if indeed it occurs, is commonly described as “asymmetric information,” it means investors and managers are subject to uneven access to or uneven possession of information.Also, the problem is said to be one of “agency.”
2.FINANCIAL ACTIVITY REGULATION: regulation.The Securities Act of 1933 and the Securities Exchange Act of 1934 led to the creation of the Securities and Exchange Commission (SEC). It consists of rules about traders of securities and trading on financial markets. A prime example of this form of regulation is the set of rules against trading by insiders who are corporate officers and others in positions to know more about a firm’s prospects than the general investing public. A second example of this type of regulation would be rules regarding the structure and operations of exchanges where securities are traded.
3. REGULATION OF FINANCIAL INSTITUTIONS: regulation.The Securities Act of 1933 and the Securities Exchange Act of 1934 led to the creation of the Securities and Exchange Commission (SEC). Financial institutions help households and firms to save; as depository institutions. They also facilitate the complex payments among many elements of the economy and they serve as conduits for the government’s monetary policy. The U.S. Government imposed an extensive array of regulations on financial institutions.
In recent years, expanded regulations restrict how financial institutions manage their assets and liabilities, in the form of minimum capital requirements for certain regulated institutions. These capital requirements are based on the various types of risk faced by regulated financial institutions and are referred to as risk-based capital requirements.
Government regulation of foreign participants limits the roles foreign firms can play in domestic markets and their ownership or control of financial institutions. Many countries regulate participation by foreign firms in domestic financial securities markets. Like most countries, the United States reviews and changes it policies regarding foreign firms’ activities in the U.S. financial markets on a regular basis.
Regulations that impede the free flow of capital and competition among financial institutions (particularly interest rates ceilings) motivate the development of financial products and trading strategies to get around these restirictions.
Through regulation.The Securities Act of 1933 and the Securities Exchange Act of 1934 led to the creation of the Securities and Exchange Commission (SEC). technologicaladvancesandthereduction in tradeandcapitalbariers, surplusfunds in onecountry can be shiftedmoreeasilytothosewhoneedfunds in anothercountry. As a result…
Twoextremeviewsseektoexplainfinancialinnovation.At oneextremearethosewhobelievethatthemajorimpetusforinnovationcomesout of theendeavortocircumvent (or “arbitrage”) regulationsandfindloopholes in taxrules.At theotherextremearethosewhoholdthattheessence of innovation is theintroduction of moreefficientfinancialinstrumentsforredistributing risk among market participants.
Ifweconsidertheultimatecauses of financialinnovation, thefollowingemerge as themostimportant:
1. Increasedvolatility of interestrates,inflation,equitypricesandexchangerates
2. Advances in computerandtelecommunicationtechnologies
3. Greater sophistication and educational training among professional market participants
4. Financial intermediary competition
5. Incentives to get around existing regulations and tax laws
6. Changing global patterns of financial wealth
Assetsecuritizationmeansthatmorethanoneinstitutionmay be involved in lendingcapital. Considerloansforthepurchase of automobiles.A lendingscenario can looklikethis:
1. A commercial bank originatesautomobileloans
2. Thecommercial bank issuessecuritiesbackedbytheseloans.
3. professional market participantsThecommercial bank obtainscredit risk insuranceforthepool of loansfrom a privateinsurancecompany
4. Thecommercial bank sellstherightto service theloanstoanothercompanythatspecializes in theservicing of loans
5. Thecommercial bank usestheservices of securitiesfirmtodistributethesecuritiestoindividualsandinstitutionalinvestors.
Financialinnovationincreaseddramatically since the 1960s, particularly in the late1970s.Althoughfinancialinnovation can be result ofarbitraryregulationsandtaxrules, innovationsthatpersistafterchanges in regulationsortaxrules, designedtopreventexploitation, arefrequentlythosethatoffer a moreefficientmeansforredistributing risk.