bună ziua!. financial institutions and markets professor lal c. chugh
TRANSCRIPT
Bună Ziua!
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!