GoalA few slides to sketch a description of the institutional configuration of the financial system today
Four items Financial assets (or securities, or “bonds” in the broadest sense of the term) Financial markets Financial institutions Central bank and other regulatory agencies
Financial assets An asset is a good that lasts A financial asset is a legal claim of ownership, i.e. a legal claim over the future benefits (net of costs) of holding a lasting good The benefits of holding a lasting good result from: Using it or consuming it, Loaning it, renting it, or leasing it, and/or Trading it (selling it or bartering it) or transferring its ownership in any other way (giving it away as a present). In a market monetary economy, these benefits can be regarded as cash (or monetary) flows
Categories of financial assets Money Stocks or equities: securities that represent partial legal ownership of a corporation Bonds: A security issued by a corporation or government promising to repay a certain amount of money Foreign-exchange securities: Foreign currencies (monetary denominations) or derivatives on foreign currencies Derivatives: contingent securities whose value depends on the value of other securities, e.g. forwards, futures, options (calls, puts), and swaps.
Financial system“Direct” finance orthrough access tofinancial markets Mainly households Mainly firms and governments Indirect finance or through financial intermediaries Source: Glenn Hubbard, Money, Banking, and the Financial System, 3rd edition.
Financial markets Physical or virtual places where people trade financial assets Physical exchanges where people meet face to face to trade (e.g. NYSE, London Stock Exchange, etc.) Over-The-Counter (OTC, e.g. NASDAQ) or virtual or electronic trading (ECNs, e.g. Instinet, Arca) Primary markets: Financial markets where newly- issued financial assets are sold for the first time Secondary markets: Financial markets where people trade existing (or outstanding) securities.
Financial institutions Financial intermediaries: firms that borrow funds from savers and loans them to borrowers Commercial banks: Financial intermediaries that take deposits from households, firms, and governments and use them to make loans or buy securities Nonbank financial intermediaries: S&Ls, savings banks, credit unions, insurance companies, pension funds, mutual funds, hedge funds, finance companies, GSEs Investment banks: Non-depository institutions that focus on advising clients, and underwriting their securities, and – until before the Dodd-Frank act – proprietary trading Other securities firms: Brokers, dealers, underwriters