The movement of financial system

1. OVERVIEW
OF THE
FINANCIAL SYSTEM
REPORTERS:
SUMALLO, JANINE
GOMEZ, CHARISSE
ALORO, MARY ANN

2. LIST OF CONTENT
PRESENTATION
THE PROBLEMS OF ADVERSE SELECTION AND MORAL HAZARD
INTRODUCTION
01
NATURE AND OBJECTIVE OF FINANCIAL SYSTEM
02
KEY COMPONENT OF THE FINANCIAL SYSTEM
03
FUNCTIONS OF THE FINANCIAL SYSTEM
04
05
06NATURE AND IMPACT OF TRANSACTION AND INFORMATION
COSTS

3. INTRODUCTION
It is a system that makes or channels funds from people
who save to people who have productive investment
opportunities.
Plays a critical role in the economy. It enables the
financial intermediation process which facilitates the flow
of funds between savers and borrowers, thus ensuring that
financial resources are allocated efficiently towards
promoting economic growth and development.
.
FINANCIAL SYSTEM
LETS GET STARTED

4. NATURE AND OBJECTIVE
OF FINANCIAL SYSTEM
Major objective of a financial system is to institutionalize
and standardize many common financial transactions, such
as the buying and selling of stocks, and to provide
common financial instruments with similar characteristics,
such as options and futures.

5. FLOW OF FUNDS THROUGH THE FINANCIAL SYSTEM

6. KEY COMPONENT OF THE
FINANCIAL SYSTEM
FINANCIAL INSTRUMENTS
FINANCIAL MARKETS ANDFINANCIAL INSTITUTIONS
THE CENTRAL BANKS AND OTHER FINANCIAL
REGULATORS

7. FUNCTIONS OF THE
FINANCIAL SYSTEM
Main task of financial system is to channel funds from
sectors that have a surplus to sectors that have a
shortage of funds.
Risk Sharing
Liquidity
Information
THREE KEY SERVICES

8. is the chance that the value of financial
assets will change relative to what one
expects.
RISK SHARING
is the ease with an asset can be
exchanged for money which savers
view as a benefit.
LIQUIDITY
is the collection and communication
of information, or facts about
borrowers and expectations of
returns on financial assets.
INFORMATION

9. THE PROBLEMS OF ADVERSE
SELECTION AND MORAL HAZARD
A company selling bonds to investors may know that its sales are declining rapidly, and it is
near bankruptcy, but the buyers of the bonds may lack this information.
Example
A key consideration for savers is the financial health of borrower.
Savers do not lend to borrowers who are are unlikely to pay them
back. unfortunately fo savers borrowers in poor finacial health have
the an incentive to gisguise this fact.,
A vital service of the financial system is the collection and
communication of information or facts about borrowers and
expectation of returns in financialassets.

10. Asymmetric Information - describes the situation in which one party to
as economic transaction has better information than does the other
party. in financial transactions, typically the borroers has more
informations than does the lender.
TWO PROBLEMS ARISING FROM ASYMMETRIC INFORMATION ARE:
Adverse Selection - this is the
problem investors experience
in distinguishing low-risk
borrowers from high-risk
borowwers before making an
investment.
Moral Hazard - this is the
problem investors experience
in verifying that borrowers are
using their funds as intended.

11. NATURE AND IMPACT OF TRANSACTION
AND INFORMATION COSTS
Transaction Costs - the cost of a trade or financial transaction.
Example: The brokerage commission charged for buying or selling a financial assets.
Information Cost - the cost that savers incur to determine the credit worthiness of
borrowers and to monetor how they use the funds acquired.
Requiring borrowers to disclose material information on their financial
performance and financial position.
Collecting information on firms and selling that information to investors.
Convincing lenders to require borrowers to pledge some of their assets as collateral
which the lender can claim of the borrower defaults.
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3.
HOW FINANCIAL INTERMEDIARIES REDUCE " ADVERSE SELECTION"

12. Specializing in monitoring borrowers and developing effective tecniques to
ensure that the funds they loan are actually used for their intended purpose.
Imposing Restrictive Covenants
1.
2.
HOW CAN INTERMEDIARIES REDUCE MORAL HAZARD PROBLEMS
HOW FINANCIAL INTERMEDIARIES REDUCE TRANSACTIOS COSTS
Financial intermediaries take advantage of economies of scale, which refers to the
reduction in average cost that results from an increase in the volume of good or service
product.
Financial intermediaries can also take advantage of economies of scale inother ways.
Financial intermediaries also take advantage of technology to provide financial services
such as those that authomated teller machine networks provide.
Financial intermediaries also increasingly rely on suphisticated software to evaluate the
credit worthiness of loan applicants.
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13. THANKS FOR
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