FEL109R Lecture 2 - Financial System

5/24/2018 FEL109R Lecture 2 - Financial System

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San Beda College Alabang

Ian Abalos, MBA

The inancial System


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San Beda College

Alabang

June 24, 2014June 24, 20142

Financial System

It is through a countrys financial systemthat entitieswith funds allocate those funds to those who havepotentially more productive ways to deploy those funds,potentially leading to faster growth for a countrys

economy. Production >> Employment >> Consumption

Y = C + I + G + XM

The financial system has three components:1. Financial Markets

2. Financial Intermediaries (aka Financial Institutions)

3. Regulator of Financial Activities

FEL109R - Treasury Management


3/9

San Beda College

Alabang

June 24, 2014June 24, 20143

Financial System

Financial

Intermediarie

s

Indirect Finance

Financial Markets

SSU/SIU/Lende

rs/Savers

HouseholdsCompanies

Government

Foreigners

DSU/DIU/Borro

wers/Spenders

CompaniesGovernment

Households

ForeignersDirect Finance

ASSETS ASSETS

ASSETS ASSETS

REGULATION



4/9

San Beda College

Alabang

June 24, 2014June 24, 20144

Financial System

Indirect Finance:an institution stands between lender andborrower.

Direct Finance:borrowers sell securities directly to lenders in the

financial markets.

Asset (Fund):any resource that is expected to provide future

benefits and, hence, has economic value.

Tangible assets: value depends on physical attributes

Intangible assets: represents a legal claim to some future

benefits (financial asset/financial instrument/security)

Financial Marketsare markets for financial instruments e.g.stocks, bonds etc, also called financial claims or securities. (Ex.

Interbank, Stock Exchange, Bond Market, Money Market, FX

Market)

Financial Institutions(also called financial intermediaries)

facilitate flows of funds from savers to borrowers. e.g. banks,finance com anies etc. Ex. Banks Insurance Com anies



5/9

San Beda College

Alabang

June 24, 2014June 24, 20145

Financial System

The budget position of any economic unit can be surplus

or deficit or balanced in a given budget period. Surplus spending units (SSUs)have income for the

period that exceeds spending, resulting in savings.

Other words for SSU are saver, lender, or investor. Deficit spending units (DSUs) have spending for the

period that exceeds income.

Another word for DSU is borrower.



6/9

San Beda College

Alabang

June 24, 2014June 24, 20146

Financial Markets

A financial market is a market wherefinancial instruments are exchanged

(traded).

Financial markets provide the following

three major economic functions: Price setting/discovery

Liquidity

Reduced transaction costs (search &

information costs)



7/9

San Beda College

Alabang

June 24, 2014June 24, 20147

Financial Intermediaries

Despite the important role of financial markets, theirrole in allowing the efficient allocation for those whohave funds to invest and those who need funds maynot always work.

Financial intermediaries come in when there areconditions that make it difficult for lenders or

investors of funds to deal directly with borrowers offunds in financial markets. This is accomplished in atwo-step process:

obtaining funds from lenders or investors

lending or investing the funds that they borrow tothose who need funds

Financial intermediaries provide the following majoreconomic functions:

Maturity intermediation

Risk reduction via diversification

Cost reduction for contracting and informationprocessing



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San Beda College

Alabang

June 24, 2014June 24, 20148

Financial Activities Regulators

Regulation takes one of four forms:

Disclosure regulation

Financial activity regulation

Regulation of financial institutions

Regulation of foreign participants

A strong financial system is vitally importantnot for Wall

Street,

not for bankers, but for working Americans. When our

markets

work, people throughout our economy benefitAmericans

seeking

to buy a car or buy a home, families borrowing to pay for

college,innovators borrowing on the strength of a good idea for a

new

product or technology, and businesses financing

investments that

create new jobs. And when our financial system is under

stress, millions of working Americans bear the

consequences. Governmenthas a responsibility to make sure our financial system is

regulated

effectively. And in this area, we can do a better job. In

sum, the ultimate beneficiaries from improved financial

regulation are Americas workers, families and

businessesboth large and small.Henry M Paulson, Jr. Secretary of the US Dept. of Treasury, March 31, 2008FEL109R - Treasury Management


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San Beda College

Alabang

June 24, 2014June 24, 20149

Financial System Key Takeaways

Financial system development is linked to economic

growth.

The role of the financial system is to facilitate production,

employment and consumption.

Resources are funneled through the system so

resources flow to their most efficient uses.


Documents

FEL109R Lecture 2 - Financial System