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Financial Institutions and Market (Chapter Three)
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Chapter Three
Interest rates in the Financial System
3.1. Introduction
For financing and investing decision making in a dynamic financial environment of market
participants, it is crucial to understand interest rates as one of the key aspects of the financial
environment. Several economic theories explain determinants of the level of interest rates.
Another group of theories explain the variety of interest rates and their term structure, i.e.
relationship between interest rates and the maturity of debt instruments.
3.2. Interest rate determination
3.2.1. The rate of interest
Interest rate is a rate of return paid by a borrower of funds to a lender of them, or a price
paid by a borrower for a service, the right to make use of funds for a specified period. Thus
it is one form of yield on financial instruments. Two questions are being raised by market
participants:
 What determines the average rate of interest in an economy?
 Why do interest rates differ on different types and lengths of loans and debt
instruments?
Interest rates vary depending on borrowing or lending decision. There is interest rate at
which banks are lending (the offer rate) and interest rate they are paying for deposits (the
bid rate). The difference between them is called a spread. Such a spread also exists
between selling and buying rates in local and international money and capital markets. The
spread between offer and bid rates provides a cover for administrative costs of the
financial intermediaries and includes their profit. The spread is influenced by the degree of
competition among financial institutions. In the short-term international money markets
the spread is lower if there is considerable competition. Conversely, the spread between
banks borrowing and lending rates to their retail customers is larger in general due to
considerably larger degree of loan default risk.
 Interest rate structure
Interest rate structure is the relationships between the various rates of interest in an
economy on financial instruments of different lengths (terms) or of different degrees of
risk.
Interest rates can be classified in to two:
1. Nominal interest rate and
2. Real interest rate
The rates of interest quoted by financial institutions are nominal rates, and are used to
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calculate interest payments to borrowers and lenders. However, the loan repayments remain
the same in money terms and make up a smaller and smaller proportion of the borrower’s
income. The real cost of the interest payments declines over time. Therefore there is a real
interest rate, i.e. the rate of interest adjusted to take into account the rate of inflation. Since
the real rate of return to the lender can be also falling over time, the lender determines
interest rates to take into account the expected rate of inflation over the period of a loan.
When there is uncertainty about the real rate of return to be received by the lender, he will
be inclined to lend at fixed interest rates for short-term. The loan can be ‘rolled over’ at a
newly set rate of interest to reflect changes in the expected rate of inflation. On the other
hand, lenders can set a floating interest rate, which is adjusted to the inflation rate changes.
Real interest rate is the difference between the nominal rate of interest and the expected
rate of inflation. It is a measure of the anticipated opportunity cost of borrowing in terms of
goods and services forgone.
The dependence between the real and nominal interest rates is expressed using the
following equation:
i =(1+ r)(1+ ie) - 1
Where i is the nominal rate of interest, r is the real rate of interest and ie e is the expected
rate of inflation.
Example Assume that a bank is providing a company with loan of 1000 thou. Euro for one
year at a real rate of interest of 3 per cent . At the end of the year it expects to receive
back 1030 thous. Euro of purchasing power at current prices. However, if the bank
expects a 10 per cent rate of inflation over the next year, it will want 1133 thous. Euro back
(10 per cent above 1030 thous). The interest rate required by the bank would be 13.3 per
cent
i = (1+ 0, 03) (1 + 0, 1) - 1 = (1, 03)(1,1) - 1 = 1,133 - 1=0,133 or 13,3 per cent
When simplified, the equation becomes: i = r + ie
In the example, this would give 3 percent plus 10 per cent = 13 per cent.
The real rate of return is thus: r = i - ie
When assumption is made that r is stable over time, the equation provides the Fisher
effect. It suggests that changes in short-term interest rates occur because of changes in the
expected rate of inflation. If a further assumption is made that expectations about the rate
of inflation of market participants are correct, then the key reason for changes in interest
rates is the changes in the current rate of inflation.
Borrowers and lenders think mostly in terms of real interest rates. There are two economic
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theories explaining the level of real interest rates in an economy:
 The loan able funds theory
 Liquidity preference theory
3.1.2. Interest rate theories:
1) Loan able funds theory
The term ‘loan able funds’ simply refers to the sums of money offered for lending and
demanded by consumers and investors during a given period of time. The interest rate in
the model is determined by the interaction between potential borrowers and potential
savers.
Loan able funds are funds borrowed and lent in an economy during a specified period of
time – the flow of money from surplus to deficit units in the economy.
The loan able funds theory was formulated by the Swedish economist Knut Wicksell in
the 1900s. According to him, the level of interest rates is determined by the supply and
demand of loan able funds available in an economy’s credit market (i.e., the sector of the
capital markets for long-term debt instruments). This theory suggests that investment and
savings in the economy determine the level of long-term interest rates. Short-term interest
rates, however, are determined by an economy’s financial and monetary conditions.
According to the loanable funds theory for the economy as a whole:
Demand for loan able funds = net investment + net additions to liquid reserves
Supply of loan able funds = net savings + increase in the money supply
Given the importance of loan able funds and that the major suppliers of loanable funds are
commercial banks, the key role of this financial intermediary in the determination of
interest rates is vivid. The central bank is implementing specific monetary policy; therefore
it influences the supply of loan able funds from commercial banks and thereby changes the
level of interest rates. As central bank increases (decreases) the supply of credit available
from commercial banks, it decreases (increases) the level of interest rate
II) Liquidity preference theory
Liquidity preference i s preference for holding financial wealth in the form of short-
term, liquid assets rather than long-term illiquid assets, based principally on the fear that
long-term assets will lose capital value over time.
Saving and investment of market participants under economic uncertainty may be much
more influenced by expectations and by exogenous shocks than by underlying real forces.
A possible response of risk-averse savers is to vary the form in which they hold their
financial wealth depending on their expectations about asset prices. Since they are
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concerned about the risk of loss in the value of assets, they are likely to vary the average
liquidity of their portfolios.
A liquid asset is the one that can be turned into money quickly, cheaply and for a known
monetary value.
Liquidity preference theory is another one aimed at explaining interest rates. J. M.
Keynes has proposed (back in 1936) a simple model, which explains how interest rates are
determined based on the preferences of households to hold money balances rather than
spending or investing those funds.
Money balances can be held in the form of currency or checking accounts, however it does
earn a very low interest rate or no interest at all. A key element in the theory is the
motivation for individuals to hold money balance despite the loss of interest income.
Money is the most liquid of all financial assets and, of course, can easily be utilized to
consume or to invest. The quantity of money held by individuals depends on their level of
income and, consequently, for an economy the demand for money is directly related to an
economy’s income. There is a trade-off between holding money balance for purposes of
maintaining liquidity and investing or lending funds in less liquid debt instruments in order
to earn a competitive market interest rate. The difference in the interest rate that can be
earned by investing in interest-bearing debt instruments and money balances represents an
opportunity cost for maintaining liquidity. The lower the opportunity cost, the greater the
demand for money balances; the higher the opportunity cost, the lower the demand for
money balance.
According to the liquidity preference theory, the level of interest rates is determined by the
supply and demand for money balances. The money supply is controlled by the policy
tools available to the country’s Central Bank. Conversely, in the loan funds theory the
level of interest rates is determined by supply and demand, however it is in the credit
market.
3.2. The structure of interest rates
The variety of interest rates that exist in the economy and the structure of interest rates is
subject to considerable change due to different factors. Such changes are important to the
operation of monetary policy. Interest rates vary because of differences in the time period,
the degree of risk, and the transactions costs associated with different financial
instruments.
The greater the risk of default associated with an asset, the higher must be the
interest rate paid upon it as compensation for the risk. This explains why some
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borrowers pay higher rates of interest than others.
3.3. Term structure of interest rates
The relationship between the yields on comparable securities but different maturities is
called the term structure of interest rates. The primary focus here is the Treasury
market. The graphic that depicts the relationship between the yields on Treasury securities
with different maturities is known as the yield curve and, therefore, the maturity spread is
also referred to as the yield curve spread.
Yield curve: Shows the relationships between the interest rates payable on bonds with
different lengths of time to maturity. That is, it shows the term structure of interest rates.
The focus on the Treasury yield curve functions is due mainly because of its role as a
benchmark for setting yields in many other sectors of the debt market. However, a
Treasury yield curve based on observed yields on the Treasury market is an unsatisfactory
measure of the relation between required yield and maturity. The key reason is that
securities with the same maturity may actually provide different yields.
Hence, it is necessary to develop more accurate and reliable estimates of the Treasury
yield curve. It is important to estimate the theoretical interest rate that the Treasury would
have to pay assuming that the security it issued is a zero-coupon security.
If the term structure is plotted at a given point in time, based on the yield to maturity, or
the spot rate, at successive maturities against maturity, one of the three shapes of the yield
curve would be observed. The type of yield curve, when the yield increases with maturity,
is referred to as an upward-sloping yield curve or a positively sloped yield curve. A
distinction is made for upward sloping yield curves based on the steepness of the yield
curve. The steepness of the yield curve is typically measured in terms of the maturity
spread between the long-term and short-term yields.
A downward-sloping or inverted yield curve is the one, where yields in general decline
as maturity increases.
A variant of the flat yield is the one in which the yield on short-term and long-term
Treasuries are similar but the yield on intermediate-term Treasuries are much lower than,
for example, the six-month and 30-year yields. Such a yield curve is referred to as a
humped yield curve.
The three observed curve for the shape of yield curve is depicted as follows:-
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Financial Institutions and Market (Chapter Three)
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Chapter Four
4. Financial Markets in the Financial System
4.1. Introduction
Investors exchange financial instruments in a financial market. The more popular term used
for the exchanging of financial instruments is that they are “traded.” Financial markets
provide the following three major economic functions: (1) price discovery, (2) liquidity, and
(3) reduced transaction costs. Despite the important role of financial markets, their role in
allowing the efficient allocation for those who have funds to invest and those who need funds
may not always work as described earlier. As a result, financial systems have found the need
for a special type of financial entity, a financial intermediary, when there are conditions that
make it difficult for lenders or investors of funds to deal directly with borrowers of funds in
financial markets. Financial markets can be classified depending on different factors and
discussed in this chapter.
4.2. Money Markets
4.2.1. Money market purpose and structure
The purpose of money markets is facilitate the transfer of short-term funds from agents
with excess funds (corporations, financial institutions, individuals, government) to those
market participants who lack funds for short-term needs.
They play central role in the country’s financial system, by influencing it through the
country’s monetary authority.
For financial institutions and to some extent to other non-financial company’s money
markets allow for executing such functions as:
 Fund raising;
 Cash management;
 Risk management;
 Speculation or position financing;
 Signaling;
 Providing access to information on prices.
The money-market instruments are often grouped in the following
way:
 Treasury bills and other short-term government securities (up to one year);
 inter bank loans, deposits and other bank liabilities;
 Repurchase agreements and similar collateralized short-term loans;
 Commercial papers, issued by non-deposit entities (non-finance companies, finance
companies, local government, etc. ;
 Certificates of deposit;
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All these instruments have slightly different characteristics, fulfilling the demand of
investors and borrowers for diversification in terms of risk, rate of return, maturity and
liquidity, and also diversification in terms of sources of financing and means of payment.
Many investors regard individual money market instruments as close substitutes, thus
changes in all money market interest rates are highly correlated.
Major characteristics of money market instruments are:
 Short-term nature;
 Low risk;
 High liquidity (in general);
 Close to money.
Money markets consist of tradable instruments as well as non-tradable instruments.
In terms of risk two specific money-market segments are:
 unsecured debt instruments markets (e.g. deposits with various maturities, ranging
from overnight to one year);
 secured debt instruments markets (e.g. REPOs) with maturities also ranging from
overnight to one year.
Differences in amount of risk are characteristic to the secured and the unsecured
segments of the money markets. Credit risk is minimized by limiting access to high-quality
counter-parties. When providing unsecured interbank deposits, a bank transfers funds to
another bank for a specified period of time during which it assumes full counterparty credit
risk. In the secured REPO markets, this counterparty credit risk is mitigated as the bank
that provides liquidity receives collateral (e.g., bonds) in return.
3.1.3. Money market participants
Money market participants include mainly credit institutions and other financial
intermediaries, governments, as well as individuals (households).
Ultimate lenders in the money markets are households and companies with a financial
surplus which they want to lend, while ultimate borrowers are companies and government
with a financial deficit which need to borrow. Ultimate lenders and borrowers usually do
not participate directly in the markets. As a rule they deal through an intermediary, who
performs functions of broker, dealer or investment banker.
Important role is played by government, which issue money market securities and use the
proceeds to finance state budget deficits. The government debt is often refinanced by
issuing new securities to pay off old debt, which matures. Thus it manages to finance long-
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term needs through money market securities with short-term maturities.
3.2. Money market instruments
1. Treasury bills (popularly referred to as T-bills) are short-term securities issued by the
U.S. government; they have original maturities of four weeks, three months, or six months.
T-bills carry no stated interest rate. Instead, the government sells these securities on a
discounted basis. This means that the holder of a T-bill realizes a return by buying these
securities for less than the maturity value and then receiving the maturity value at maturity.
2. Commercial paper is a promissory note—a written promise to pay—issued by a
large, creditworthy corporation or a municipality. This financial instrument has an original
maturity that typically ranges from one day to 270 days. The issuers of most commercial
paper back up the paper with bank lines of credit, which means that a bank is standing by
ready to pay the obligation if the issuer is unable to. Commercial paper may be either interest
bearing or sold on a discounted basis.
3. Certificates of deposit (CDs) are written promises by a bank to pay a depositor.
Investors can buy and sell negotiable certificates of deposit, which are CDs issued by large
commercial banks. Negotiable CDs typically have original maturities between one month and
one year and have denominations of $100,000 or more. Investors pay face value for
negotiable CDs, and receive a fixed rate of interest on the CD. On the maturity date, the
issuer repays the principal, plus interest.
4. Another form of short-term borrowing is the repurchase agreement. To understand a
repurchase agreement, we will briefly describe why companies use this instrument. There are
participants in the financial system that use leverage in implementing trading strategies in the
bond market. That is, the strategy involves buying bonds with borrowed funds. Rather than
borrowing from a bank, a market participant can use the bonds it has acquired as collateral
for a loan. Specifically, the lender will loan a certain amount of funds to an entity in need of
funds using the bonds as collateral. We refer to this common lending agreement as a
repurchase agreement or repo because it specifies that the borrower sells the bonds to the
lender in exchange for proceeds and at some specified future date the borrower repurchases
the bonds from the lender at a specified price. The specified price, called the repurchase
price, is higher than the price at which the bonds are sold because it embodies the interest
cost that the lender is charging the borrower.
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The interest rate in a repo is the repo rate. Thus, a repo is nothing more than a collateralized
loan; that is, a loan backed by a specific asset. We classify it as a money market instrument
because the term of a repo is typically less than one year.
5. Bankers’ acceptances are short-term loans, usually to importers and exporters, made by
banks to finance specific transactions. An acceptance is created when a draft (a promise to
pay) is written by a bank’s customer and the bank “accepts” it, promising to pay. The bank’s
acceptance of the draft is a promise to pay the face amount of the draft to whoever presents it
for payment. The bank’s customer then uses the draft to finance a transaction,
giving this draft to the supplier in exchange for goods. Because acceptances arise from
specific transactions, they are available in a wide variety of principal amounts. Typically,
bankers’ acceptances have maturities of less than 180 days. Bankers’ acceptances are sold at
a discount from their face value, and the face value is paid at maturity. The likelihood of
default on bankers’ acceptances is very small because acceptances are backed by both the
issuing bank and the purchaser of goods.
4.3. The Capital Market
The capital market is the sector of the financial market where long-term financial
instruments issued by corporations and governments trade. Here “long-term” refers to a
financial instrument with an original maturity greater than one year and perpetual securities
(those with no maturity). There are two types of capital market securities: those that represent
shares of ownership interest, also called equity, issued by corporations, and those that
represent indebtedness, issued by corporations and by the U.S., state, and local governments.
Earlier we described the distinction between equity and debt instruments. Equity includes
common stock and preferred stock. Because common stock represents ownership of the
corporation, and because the corporation has a perpetual life, common stock is a perpetual
security; it has no maturity. Preferred stock also represents ownership interest in a
corporation and can
either have a redemption date or be perpetual. A capital market debt obligation is a financial
instrument whereby the borrower promises to repay the maturity value at a specified period
of
time beyond one year. We can break down these debt obligations into two categories: bank
loans and debt securities. While at one time, bank loans were not considered capital market
instruments, today there is a market for the trading of these debt obligations. One form of
such a bank loan is a syndicated bank loan. This is a loan in which a group (or syndicate) of
banks provides funds to the borrower. The need for a group of banks arises because the
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exposure in terms of the credit risk and the amount sought by a borrower may be too large for
any one bank.
Debt securities include (1) bonds, (2) notes, (3) medium-term notes, and (4) asset-backed
securities. The distinction between a bond and a note has to do with the number of years until
the obligation matures when the issuer originally issued the security. Historically, a note is a
debt security with a maturity at issuance of 10 years or less; a bond is a debt security with
a maturity greater than 10 years. The distinction between a note and a medium-term note has
nothing to do with the maturity, but rather the method of issuing the security.
4.4. The Primary Market
When an issuer first issues a financial instrument, it is sold in the primary market.
Companies sell new issues and thus raise new capital in this market. Therefore, it is the
market whose sales generate proceeds for the issuer of the financial instrument. Issuance of
securities must comply with the U.S. securities laws. The primary market consists of both a
public market and a
Private placement market. The public market offering of new issues typically involves the
use of an investment bank. The process of investment banks bringing these securities to the
public markets is underwriting. Another method of offering new issues is through an auction
process. Bonds by certain entities such as municipal governments and some regulated entities
are issued in this way. There are different regulatory requirements for securities issued to the
general investing public and those privately placed. The two major securities laws in the
United States—the Securities Act of 1933 and the Securities Exchange Act of 1934—require
that unless otherwise exempted, all securities offered to the general public must register with
the SEC. One of the exemptions set forth in the 1933 Act is for “transactions by an issuer not
involving any public offering.” We refer to such offerings as private placement offerings.
Prior to 1990, buyers of privately placed securities were not permitted to sell these securities
for two years after acquisition. SEC Rule 144A, approved by the SEC in 1990, eliminates the
two-year
Holding period if certain conditions are met As a result; the private placement market is now
classified into two categories: Rule 144A offerings and non-Rule 144A (commonly referred
to as traditional private placements).
4.5. The Secondary Market
A secondary market is one in which financial instruments are resold among investors. Issuers
do not raise new capital in the secondary market and, therefore, the issuer of the security does
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not receive proceeds from the sale. Trading takes place among investors. Investors who buy
and sell securities
on the secondary markets may obtain the services of stockbrokers, entities who buy or sell
securities for their clients. We categorize secondary markets based on the way in which they
trade, referred to as market structure. There are two overall market structures for trading
financial instruments: order driven and quote driven. Market structure is the mechanism by
which buyers and sellers interact
to determine price and quantity. In an order-driven market structure, buyers and sellers
submit their bids through their broker, who relays these bids to a centralized location for bid-
matching, and transaction execution. We also refer to an order-driven market as an auction
market.
In a quote-driven market structure, intermediaries (market makers or dealers) quote the
prices at which the public participants trade. Market makers provide a bid quote (to buy) and
an offer quote (to sell), and realize revenues from the spread between these two quotes. Thus,
market makers
Derive a profit from the spread and the turnover of their inventory of a security. There are
hybrid market structures that have elements of both a quote-driven and order-driven market
structure.
We can also classify secondary markets in terms of organized exchanges and over-the-
counter markets. Exchanges are central trading locations where financial instruments trade.
The financial instruments must be those listed by the organized exchange. By listed, we mean
the financial
Instrument has been accepted for trading on the exchange. To be listed, the issuer must
satisfy requirements set forth by the exchange. In the case of common stock, the major
organized exchange is the New York Stock Exchange (NYSE). For the common stock of a
corporation to list on the NYSE, for example, it must meet minimum requirements for pretax
earnings, net tangible assets, market capitalization, and number and distribution of shares
publicly held. In the United States, the SEC must approve the market to qualify it as an
exchange. In contrast, an over-the-counter market (OTC market) is generally where unlisted
financial instruments trade. For common stock, there are
Listed and unlisted stocks. Although there are listed bonds, bonds are typically unlisted and
therefore trade over-the-counter. The same is true of loans. The foreign exchange market is
an OTC market. There are listed and unlisted derivative instruments.
4.6. Debt Markets
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Debt markets are used by both firms and governments to raise funds for long-term purposes,
though most investment by firms is financed by retained profits. Bonds are long-term
borrowing instruments for the issuer. Major issuers of bonds are governments (Treasury
bonds in US, gilts in the UK, Bunds in Germany) and firms, which issue corporate bonds
Corporate as well as government bonds vary very considerably in terms of their risk. Some
corporate bonds are secured against assets of the company that issued them, whereas other
bonds are unsecured. Bonds secured on the assets of the issuing company are known as
debentures. Bonds that are not secured are referred to as loan stock. Banks are major issuers
of loan stock. The fact that unsecured bonds do not provide their holders with a claim on the
assets of the issuing firm in the event of default is normally compensated for
by means of a higher rate of coupon payment. Important characteristics of bonds involve:
The conventional or straight bond has the following characteristics: Residual maturity (or
redemption date). As time passes, the residual maturity of any bond shortens. Bonds are
classified into ‘short-term’ (with lives up to five years); ‘medium-term’ (from five to fifteen
years) ; ‘long-term’(over fifteen years). Bonds pay a fixed rate of interest, called coupon. It
is normally made in two installments, at six-monthly intervals, each equal to half the rate
specified in the
Bond’s coupon. The coupon divided by the par value of the bond (100 Euro) gives the
coupon
rate on the bond. The par or redemption value of bonds is commonly 100 Euro (or other
currency). This is also the price at which bonds are first issued. However, since the
preparations for issue take time, market conditions may change in such a way as to make the
bonds unattractive at their existing coupon at the time they are offered for sale. They will
then have to be sold at a discount to 100 Euro, in order to make the coupon rate approximate
the market rate of interest. If, vise versa, the market interest rates fall, the coupon may make
the bond attractive at a price above 100 Euro. In these cases the issuers are making a last-
minute adjustment to the price which they hope will make the bonds acceptable to the
market.
Bond prices fluctuate inversely with market interest rates. If market rates rise, people
prefer to hold the new, higher-yielding issues than existing bonds. Existing bonds will be
sold and their price will fall. Eventually, existing bonds with various coupons will be
willingly held, but only when their price has fallen to the point where the coupon expressed
as a percentage of the current price approximates the new market rate.
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4.7. Equity Markets
Equity market is one of the key sectors of financial markets where long-term financial
instruments are traded. The purpose of equity instruments issued by corporations is to raise
funds for the firms. The provider of the funds is granted a residual claim on the company’s
income, and becomes one of the owners of the firm. For market participants equity securities
mean holding wealth as well as a source of new finance, and are of great significance for
savings and investment process in a market economy.
The purpose of equity is the following:
 A new issue of equity shares is an important source of external corporate financing;
 Equity shares perform a financing role from internally generated funds (retained
earnings);
 Equity shares perform an institutional role as a means of ownership.
Within the savings-investment process magnitude of retained earnings exceeds that of the
new stock issues and constitutes the main source of funds for the firms. Equity instruments
can be traded publicly and privately.
External financing through equity instruments is determined by the following financial
factors:
 The degree of availability of internal financing within total financing needs of the
firm;
 The cost of available alternative financing sources;
 Current market price of the firm’s equity shares, which determines the return of
equity investments.
Internal equity financing of companies is provided through retained earnings. When
internally generated financing is scarce due to low levels of profitability and retained
earnings, and also due to low depreciation, but the need for long-term investments is high,
companies turn to look for external financing sources. Firms may raise funds by issuing
equity that grants the investor a residual claim on the company’s income. Low interest rates
provide incentives for use of debt instruments, thus lowering demand for new equity issues.
High equity issuance costs force companies to look for other sources of financing as well.
However, during the period of stock market growth high market prices of equity shares
encourage companies to issue new equity, providing with the possibility to attract larger
magnitude of funds from the market players.
Equity instruments
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1. Common shares
Common (ordinary) shares represent partial ownership of the company and provide their
holders claims to future streams of income, paid out of company profits and commonly
referred to as dividends. Common shareholders are residual claimants, i.e. they are entitled to
a share only in those profits which remain after bondholders and preference shareholders
have been paid. If the company is liquidated, shareholders have a claim on any remaining
assets only after prior claimants have been paid. Therefore common shareholders face larger
risks than other stakeholders of the company (e.g. bondholders and owners of preferred
shares. On the other hand, if the value of the company increases, the shareholders are entitled
to larger potential benefits, which may well exceed the guaranteed interest of bondholders.
Common or ordinary share (stock) – an equity share that
does not have a fixed dividend yield.
2. Preferred shares
Preferred shares is a financial instrument, which represents an equity interest in a firm and
which usually does not allow for voting rights of its owners. Typically the investor into it is
only entitled to receive a fixed contractual amount of dividends and this make this instrument
similar to debt. However, it is similar to an equity instrument because the payment is only
made after payments to the investors in the firm’s debt instruments are satisfied. Therefore it
is call a hybrid instrument.
Technically preferred shareholders share ownership of the firm with common shareholders
and are compensated when company generates earnings. Therefore, if the company does not
earn sufficient net profit, from which to pay the preferred share dividends it may not pay
dividends without the risk of bankruptcy. Because preferred stockholders typically are
entitled to a fixed contractual amount, preferred stock is referred to as a fixed income
instrument. Preferred share – an equity security, which carries a predetermined constant
dividend payment.
4.8. Derivative Market
We classify financial markets in terms of cash markets and derivative markets. The cash
market, also referred to as the spot market, is the market for the immediate purchase and sale
of a financial instrument. In contrast, some financial instruments are contracts that specify
that the contract holder has either the obligation or the choice to buy or sell something at or
by some future date. The “something” that is the subject of the contract is the underlying
asset or simply the underlying. The underlying can be a stock, a bond, a financial index, an
interest rate, a currency, or a commodity. Such contracts derive their value from the value of
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17
the underlying; hence, we refer to these contracts as derivative instruments, or simply
derivatives, and the market in which they trade is the derivatives market. Derivatives
instruments, or simply derivatives, include futures, forwards, options, swaps, caps, and
floors. We postpone a discussion of these important financial instruments, as well as their
applications in corporate finance and portfolio management, to later chapters. The primary
role of derivative instruments is to provide a transitionally efficient vehicle for protecting
against various types of risk encountered by investors and issuers. Admittedly, it is difficult
to see at this early stage
how derivatives are useful for controlling risk in an efficient way since too often the popular
press focuses on how derivatives have been misused by corporate treasurers and portfolio
managers.
Financial Institutions and Market (Chapter Three)
18
C
CH
HA
AP
PT
TE
ER
R F
FI
IV
VE
E
R
RE
EG
GU
UA
AL
LT
TI
IO
ON
N O
OF
F F
FI
IN
NA
AN
NC
CI
IA
AL
L M
MA
AR
RK
KE
ET
TS
S A
AN
ND
D I
IN
NS
ST
TI
IT
TU
UT
TI
IO
ON
NS
S
5
5.
.1
1.
. P
Pu
ur
rp
po
os
se
e o
of
f R
Re
eg
gu
ul
la
at
ti
io
on
n
F
Fi
in
na
an
nc
ci
ia
al
l i
in
ns
st
ti
it
tu
ut
ti
io
on
ns
s a
ar
re
e t
th
he
e m
mo
os
st
t h
he
ea
av
vi
il
ly
y r
re
eg
gu
ul
la
at
te
ed
d o
of
f a
al
ll
l b
bu
us
si
in
ne
es
ss
se
es
s i
in
n t
th
he
e w
wo
or
rl
ld
d.
. A
Ar
ro
ou
un
nd
d t
th
he
e
g
gl
lo
ob
be
e t
th
he
es
se
e f
fi
in
na
an
nc
ci
ia
al
l s
se
er
rv
vi
ic
ce
e f
fi
ir
rm
ms
s f
fa
ac
ce
e s
st
tr
ri
in
ng
ge
en
nt
t g
go
ov
ve
er
rn
nm
me
en
nt
t r
ru
ul
le
es
s l
li
im
mi
it
ti
in
ng
g t
th
he
e s
se
er
rv
vi
ic
ce
es
s t
th
he
ey
y c
ca
an
n
o
of
ff
fe
er
r,
, t
te
er
rr
ri
it
to
or
ri
ie
es
s/
/l
la
an
nd
d t
th
he
ey
y c
ca
an
n e
en
nt
te
er
r,
, t
th
he
e m
ma
ak
ke
eu
up
p o
of
f t
th
he
ei
ir
r p
po
or
rt
tf
fo
ol
li
io
os
s o
of
f a
as
ss
se
et
ts
s,
, l
li
ia
ab
bi
il
li
it
ti
ie
es
s,
, a
an
nd
d c
ca
ap
pi
it
ta
al
l,
,
a
an
nd
d e
ev
ve
en
n h
ho
ow
w t
th
he
ey
y p
pr
ri
ic
ce
e a
an
nd
d d
de
el
li
iv
ve
er
r t
th
he
ei
ir
r s
se
er
rv
vi
ic
ce
es
s t
to
o t
th
he
e p
pu
ub
bl
li
ic
c.
. O
Ov
ve
er
r t
th
he
e c
ce
en
nt
tu
ur
ri
ie
es
s a
a v
va
ar
ri
ie
et
ty
y o
of
f
r
re
ea
as
so
on
ns
s h
ha
av
ve
e b
be
ee
en
n o
of
ff
fe
er
re
ed
d f
fo
or
r h
he
ea
av
vy
y g
go
ov
ve
er
rn
nm
me
en
nt
t i
in
nt
te
er
rr
ru
up
pt
ti
io
on
n i
in
nt
to
o t
th
he
e f
fi
in
na
an
nc
ci
ia
al
l i
in
ns
st
ti
it
tu
ut
ti
io
on
ns
s’
’ s
se
ec
ct
to
or
r,
,
i
in
nc
cl
lu
ud
di
in
ng
g p
pr
ro
ot
te
ec
ct
ti
in
ng
g t
th
he
e p
pu
ub
bl
li
ic
c’
’s
s s
sa
av
vi
in
ng
gs
s a
an
nd
d e
en
ns
su
ur
ri
in
ng
g t
th
ha
at
t c
co
on
ns
su
um
me
er
rs
s r
re
ec
ce
ei
iv
ve
e a
an
n a
ad
de
eq
qu
ua
at
te
e q
qu
ua
an
nt
ti
it
ty
y
a
an
nd
d q
qu
ua
al
li
it
ty
y o
of
f f
fi
in
na
an
nc
ci
ia
al
l s
se
er
rv
vi
ic
ce
es
s t
th
ha
at
t a
ar
re
e r
re
ea
as
so
on
na
ab
bl
ly
y p
pr
ri
ic
ce
ed
d.
.
M
Ma
an
ny
y e
ec
co
on
no
om
mi
is
st
ts
s,
, f
fi
in
na
an
nc
ci
ia
al
l a
an
na
al
ly
ys
st
ts
s,
, a
an
nd
d f
fi
in
na
an
nc
ci
ia
al
l i
in
ns
st
ti
it
tu
ut
ti
io
on
ns
s h
ha
av
ve
e a
ar
rg
gu
ue
ed
d o
ov
ve
er
r t
th
he
e y
ye
ea
ar
rs
s t
th
ha
at
t
g
go
ov
ve
er
rn
nm
me
en
nt
t r
re
eg
gu
ul
la
at
ti
io
on
n h
ha
as
s d
do
on
ne
e m
mo
or
re
e h
ha
ar
rm
m t
th
ha
an
n g
go
oo
od
d f
fo
or
r b
bo
ot
th
h f
fi
in
na
an
nc
ci
ia
al
l i
in
ns
st
ti
it
tu
ut
ti
io
on
ns
s t
th
he
em
ms
se
el
lv
ve
es
s
a
an
nd
d f
fo
or
r t
th
he
e p
pu
ub
bl
li
ic
c t
th
he
ey
y s
se
er
rv
ve
e.
. I
In
n p
pa
ar
rt
ti
ic
cu
ul
la
ar
r,
, g
go
ov
ve
er
rn
nm
me
en
nt
t r
re
es
st
tr
ri
ic
ct
ti
io
on
ns
s a
al
ll
le
eg
ge
ed
dl
ly
y h
ha
av
ve
e a
al
ll
lo
ow
we
ed
d n
no
on
n
r
re
eg
gu
ul
la
at
te
ed
d o
or
r l
le
es
ss
s r
re
eg
gu
ul
la
at
te
ed
d f
fi
in
na
an
nc
ci
ia
al
l s
se
er
rv
vi
ic
ce
e f
fi
ir
rm
ms
s t
to
o a
at
tt
ta
ac
ck
k t
th
he
e m
ma
ar
rk
ke
et
ts
s a
an
nd
d c
ca
ap
pt
tu
ur
re
e m
ma
an
ny
y o
of
f l
le
es
ss
s
r
re
eg
gu
ul
la
at
te
ed
d f
fi
in
na
an
nc
ci
ia
al
l s
se
er
rv
vi
ic
ce
es
s,
, w
wh
ho
o a
ar
re
e n
no
ot
t s
su
uf
ff
fi
ic
ci
ie
en
nt
tl
ly
y f
fr
re
ee
e t
to
o c
co
om
mp
pe
et
te
e e
ef
ff
fe
ec
ct
ti
iv
ve
el
ly
y.
. M
Mo
or
re
eo
ov
ve
er
r,
,
r
re
eg
gu
ul
la
at
ti
io
on
ns
s a
ar
re
e o
of
ft
te
en
n b
ba
ac
ck
kw
wa
ar
rd
d l
lo
oo
ok
ki
in
ng
g,
, a
ad
dd
dr
re
es
ss
si
in
ng
g p
pr
ro
ob
bl
le
em
ms
s w
wh
hi
ic
ch
h h
ha
av
ve
e l
lo
on
ng
g s
si
in
nc
ce
e d
di
is
sa
ap
pp
pe
ea
ar
re
ed
d,
,
a
an
nd
d t
th
he
ey
y m
ma
ay
y c
co
om
mp
po
ou
un
nd
d t
th
hi
is
s p
pr
ro
ob
bl
le
em
m o
of
f “
“r
re
el
le
ev
va
an
nc
cy
y”
” b
by
y c
ch
ha
an
ng
gi
in
ng
g m
mu
uc
ch
h m
mo
or
re
e s
sl
lo
ow
wl
ly
y t
th
ha
an
n t
th
he
e f
fr
re
ee
e
m
ma
ar
rk
ke
et
tp
pl
la
ac
ce
e,
, i
in
nh
hi
ib
bi
it
ti
in
ng
g t
th
he
e a
ab
bi
il
li
it
ty
y o
of
f t
th
he
e r
re
eg
gu
ul
la
at
te
ed
d f
fi
in
na
an
nc
ci
ia
al
l i
in
ns
st
ti
it
tu
ut
ti
io
on
ns
s t
to
o s
st
ta
ay
y a
ab
br
re
ea
as
st
t o
of
f n
ne
ew
w
t
te
ec
ch
hn
no
ol
lo
og
gi
ie
es
s a
an
nd
d c
ch
ha
an
ng
gi
in
ng
g c
cu
us
st
to
om
me
er
r t
ta
as
st
te
es
s.
.
5
5.
.2
2.
. P
Pr
ri
in
nc
ci
ip
pl
le
es
s o
of
f R
Re
eg
gu
ul
la
at
ti
io
on
n
R
Re
eg
gu
ul
la
at
ti
io
on
n,
, h
ho
ow
we
ev
ve
er
r,
, h
ha
as
s g
gr
re
ea
at
t p
po
ot
te
en
nt
ti
ia
al
l t
to
o i
im
mp
po
os
se
e c
co
os
st
ts
s a
an
nd
d s
sh
ho
ou
ul
ld
d b
be
e d
de
es
si
ig
gn
ne
ed
d t
to
o m
me
ee
et
t i
it
ts
s p
pu
ur
rp
po
os
se
es
s
w
wh
hi
il
le
e m
mi
in
ni
im
mi
iz
zi
in
ng
g d
di
ir
re
ec
ct
t c
co
os
st
ts
s o
of
f r
re
eg
gu
ul
la
at
ti
io
on
n a
an
nd
d t
th
he
e b
br
ro
oa
ad
de
er
r c
co
os
st
ts
s a
ar
ri
is
si
in
ng
g f
fr
ro
om
m r
ru
ul
le
es
s w
wh
hi
ic
ch
h r
re
es
st
tr
ri
ic
ct
t
e
ec
co
on
no
om
mi
ic
c a
ac
ct
ti
iv
vi
it
ty
y.
. T
Th
hu
us
s,
, r
re
eg
gu
ul
la
at
ti
io
on
n r
re
eq
qu
ui
ir
re
es
s t
th
ha
at
t a
a c
ca
ar
re
ef
fu
ul
l b
ba
al
la
an
nc
ce
e b
be
e s
st
tr
ru
uc
ck
k b
b/
/n
n e
ef
ff
fe
ec
ct
ti
iv
ve
en
ne
es
ss
s &
&
e
ef
ff
fi
ic
ci
ie
en
nc
cy
y

 C
Co
om
mp
pe
et
ti
it
ti
iv
ve
e N
Ne
eu
ut
tr
ra
al
li
it
ty
y
C
Co
om
mp
pe
et
ti
it
ti
iv
ve
e n
ne
eu
ut
tr
ra
al
li
it
ty
y r
re
eq
qu
ui
ir
re
es
s t
th
ha
at
t t
th
he
e r
re
eg
gu
ul
la
at
to
or
ry
y b
bu
ur
rd
de
en
n a
ap
pp
pl
ly
yi
in
ng
g t
to
o a
a p
pa
ar
rt
ti
ic
cu
ul
la
ar
r f
fi
in
na
an
nc
ci
ia
al
l
c
co
om
mm
mi
it
tm
me
en
nt
t o
or
r p
pr
ro
om
mi
is
se
e a
ap
pp
pl
ly
y t
to
o a
al
ll
l w
wh
ho
o m
ma
ak
ke
e s
su
uc
ch
h c
co
om
mm
mi
it
tm
me
en
nt
ts
s.
. I
It
t r
re
eq
qu
ui
ir
re
es
s f
fu
ur
rt
th
he
er
r t
th
ha
at
t t
th
he
er
re
e
b
be
e:
:
›
› M
Mi
in
ni
im
ma
al
l b
ba
ar
rr
ri
ie
er
rs
s t
to
o e
en
nt
tr
ry
y a
an
nd
d e
ex
xi
it
t f
fr
ro
om
m m
ma
ar
rk
ke
et
ts
s a
an
nd
d p
pr
ro
od
du
uc
ct
ts
s;
;
›
› N
No
o u
un
nd
du
ue
e r
re
es
st
tr
ri
ic
ct
ti
io
on
ns
s o
on
n i
in
ns
st
ti
it
tu
ut
ti
io
on
ns
s o
or
r t
th
he
e p
pr
ro
od
du
uc
ct
ts
s t
th
he
ey
y o
of
ff
fe
er
r;
; a
an
nd
d
›
› M
Ma
ar
rk
ke
et
ts
s o
op
pe
en
n t
to
o t
th
he
e w
wi
id
de
es
st
t p
po
os
ss
si
ib
bl
le
e r
ra
an
ng
ge
e o
of
f p
pa
ar
rt
ti
ic
ci
ip
pa
an
nt
ts
s.
.

 C
Co
os
st
t E
Ef
ff
fe
ec
ct
ti
iv
ve
en
ne
es
ss
s
Financial Institutions and Market (Chapter Three)
19
C
Co
os
st
t e
ef
ff
fe
ec
ct
ti
iv
ve
en
ne
es
ss
s i
is
s o
on
ne
e o
of
f t
th
he
e m
mo
os
st
t d
di
if
ff
fi
ic
cu
ul
lt
t i
is
ss
su
ue
es
s f
fo
or
r r
re
eg
gu
ul
la
at
to
or
ry
y c
cu
ul
lt
tu
ur
re
es
s t
to
o c
co
om
me
e t
to
o t
te
er
rm
ms
s
w
wi
it
th
h.
. A
An
ny
y f
fo
or
rm
m o
of
f r
re
eg
gu
ul
la
at
ti
io
on
n i
in
nv
vo
ol
lv
ve
es
s a
a n
na
at
tu
ur
ra
al
l t
te
en
ns
si
io
on
n b
be
et
tw
we
ee
en
n e
ef
ff
fe
ec
ct
ti
iv
ve
en
ne
es
ss
s a
an
nd
d e
ef
ff
fi
ic
ci
ie
en
nc
cy
y.
.
R
Re
eg
gu
ul
la
at
ti
io
on
n c
ca
an
n b
be
e m
ma
ad
de
e t
to
ot
ta
al
ll
ly
y e
ef
ff
fe
ec
ct
ti
iv
ve
e b
by
y s
si
im
mp
pl
ly
y p
pr
ro
oh
hi
ib
bi
it
ti
in
ng
g a
al
ll
l a
ac
ct
ti
io
on
ns
s p
po
ot
te
en
nt
ti
ia
al
ll
ly
y
i
in
nc
co
om
mp
pa
at
ti
ib
bl
le
e w
wi
it
th
h t
th
he
e r
re
eg
gu
ul
la
at
to
or
ry
y o
ob
bj
je
ec
ct
ti
iv
ve
e.
. B
Bu
ut
t,
, b
by
y i
in
nh
hi
ib
bi
it
ti
in
ng
g p
pr
ro
od
du
uc
ct
ti
iv
ve
e a
ac
ct
ti
iv
vi
it
ti
ie
es
s a
al
lo
on
ng
g w
wi
it
th
h
t
th
he
e a
an
nt
ti
i-
-s
so
oc
ci
ia
al
l,
, s
su
uc
ch
h a
an
n a
ap
pp
pr
ro
oa
ac
ch
h i
is
s l
li
ik
ke
el
ly
y t
to
o b
be
e h
hi
ig
gh
hl
ly
y i
in
ne
ef
ff
fi
ic
ci
ie
en
nt
t.
.
T
Th
he
e u
un
nd
de
er
rl
ly
yi
in
ng
g l
le
eg
gi
is
sl
la
at
ti
iv
ve
e f
fr
ra
am
me
ew
wo
or
rk
k m
mu
us
st
t b
be
e e
ef
ff
fe
ec
ct
ti
iv
ve
e,
, i
in
nc
cl
lu
ud
di
in
ng
g b
by
y f
fo
os
st
te
er
ri
in
ng
g c
co
om
mp
pl
li
ia
an
nc
ce
e
t
th
hr
ro
ou
ug
gh
h e
en
nf
fo
or
rc
ce
em
me
en
nt
t i
in
n c
ca
as
se
es
s w
wh
he
er
re
e p
pa
ar
rt
ti
ic
ci
ip
pa
an
nt
ts
s d
do
o n
no
ot
t a
ab
bi
id
de
e b
by
y t
th
he
e r
ru
ul
le
es
s.
.
H
Ho
ow
we
ev
ve
er
r,
, a
a c
co
os
st
t-
-e
ef
ff
fe
ec
ct
ti
iv
ve
e r
re
eg
gu
ul
la
at
to
or
ry
y s
sy
ys
st
te
em
m a
al
ls
so
o r
re
eq
qu
ui
ir
re
es
s:
:
›
› A
A p
pr
re
es
su
um
mp
pt
ti
io
on
n i
in
n f
fa
av
vo
or
r o
of
f m
mi
in
ni
im
ma
al
l r
re
eg
gu
ul
la
at
ti
io
on
n u
un
nl
le
es
ss
s a
a h
hi
ig
gh
he
er
r l
le
ev
ve
el
l o
of
f i
in
nt
te
er
rv
ve
en
nt
ti
io
on
n i
is
s
j
ju
us
st
ti
if
fi
ie
ed
d;
;
›
› A
Al
ll
lo
oc
ca
at
ti
io
on
n o
of
f f
fu
un
nc
ct
ti
io
on
ns
s a
am
mo
on
ng
g r
re
eg
gu
ul
la
at
to
or
ry
y b
bo
od
di
ie
es
s w
wh
hi
ic
ch
h m
mi
in
ni
im
mi
iz
ze
es
s o
ov
ve
er
rl
la
ap
ps
s,
, d
du
up
pl
li
ic
ca
at
ti
io
on
n &
&
c
co
on
nf
fl
li
ic
ct
ts
s;
;
›
› A
An
n e
ex
xp
pl
li
ic
ci
it
t m
ma
an
nd
da
at
te
e f
fo
or
r r
re
eg
gu
ul
la
at
to
or
ry
y b
bo
od
di
ie
es
s t
to
o b
ba
al
la
an
nc
ce
e e
ef
ff
fi
ic
ci
ie
en
nc
cy
y a
an
nd
d e
ef
ff
fe
ec
ct
ti
iv
ve
en
ne
es
ss
s;
; a
an
nd
d
›
› T
Th
he
e a
al
ll
lo
oc
ca
at
ti
io
on
n o
of
f r
re
eg
gu
ul
la
at
to
or
ry
y c
co
os
st
ts
s t
to
o t
th
ho
os
se
e e
en
nj
jo
oy
yi
in
ng
g t
th
he
e b
be
en
ne
ef
fi
it
ts
s.
.

 T
Tr
ra
an
ns
sp
pa
ar
re
en
nc
cy
y
I
If
f t
th
he
er
re
e i
is
s a
a g
ge
en
ne
er
ra
al
l p
pe
er
rc
ce
ep
pt
ti
io
on
n t
th
ha
at
t a
a p
pa
ar
rt
ti
ic
cu
ul
la
ar
r g
gr
ro
ou
up
p o
of
f f
fi
in
na
an
nc
ci
ia
al
l i
in
ns
st
ti
it
tu
ut
ti
io
on
ns
s c
ca
an
nn
no
ot
t f
fa
ai
il
l
b
be
ec
ca
au
us
se
e t
th
he
ey
y h
ha
av
ve
e t
th
he
e i
im
mp
pr
ri
im
ma
at
tu
ur
r o
of
f g
go
ov
ve
er
rn
nm
me
en
nt
t,
, t
th
he
er
re
e i
is
s a
a g
gr
re
ea
at
t d
da
an
ng
ge
er
r t
th
ha
at
t p
pe
er
rc
ce
ep
pt
ti
io
on
n w
wi
il
ll
l
b
be
ec
co
om
me
e r
re
ea
al
li
it
ty
y.
. T
Tr
ra
an
ns
sp
pa
ar
re
en
nc
cy
y o
of
f r
re
eg
gu
ul
la
at
ti
io
on
n r
re
eq
qu
ui
ir
re
es
s t
th
ha
at
t a
al
ll
l g
gu
ua
ar
ra
an
nt
te
ee
es
s b
be
e m
ma
ad
de
e e
ex
xp
pl
li
ic
ci
it
t a
an
nd
d
t
th
ha
at
t a
al
ll
l p
pu
ur
rc
ch
ha
as
se
er
rs
s a
an
nd
d p
pr
ro
ov
vi
id
de
er
rs
s o
of
f f
fi
in
na
an
nc
ci
ia
al
l p
pr
ro
od
du
uc
ct
ts
s b
be
e f
fu
ul
ll
ly
y a
aw
wa
ar
re
e o
of
f t
th
he
ei
ir
r r
ri
ig
gh
ht
ts
s a
an
nd
d
r
re
es
sp
po
on
ns
si
ib
bi
il
li
it
ti
ie
es
s.
. I
It
t s
sh
ho
ou
ul
ld
d b
be
e a
a t
to
op
p p
pr
ri
io
or
ri
it
ty
y o
of
f a
an
n e
ef
ff
fe
ec
ct
ti
iv
ve
e f
fi
in
na
an
nc
ci
ia
al
l r
re
eg
gu
ul
la
at
to
or
ry
y s
st
tr
ru
uc
ct
tu
ur
re
e t
th
ha
at
t
f
fi
in
na
an
nc
ci
ia
al
l p
pr
ro
om
mi
is
se
es
s (
(b
bo
ot
th
h p
pu
ub
bl
li
ic
c a
an
nd
d p
pr
ri
iv
va
at
te
e)
) b
be
e u
un
nd
de
er
rs
st
to
oo
od
d.
.

 F
Fl
le
ex
xi
ib
bi
il
li
it
ty
y
T
Th
he
e r
re
eg
gu
ul
la
at
to
or
ry
y f
fr
ra
am
me
ew
wo
or
rk
k m
mu
us
st
t h
ha
av
ve
e t
th
he
e f
fl
le
ex
xi
ib
bi
il
li
it
ty
y t
to
o c
co
op
pe
e w
wi
it
th
h c
ch
ha
an
ng
gi
in
ng
g i
in
ns
st
ti
it
tu
ut
ti
io
on
na
al
l a
an
nd
d
p
pr
ro
od
du
uc
ct
t s
st
tr
ru
uc
ct
tu
ur
re
es
s w
wi
it
th
ho
ou
ut
t l
lo
os
si
in
ng
g i
it
ts
s e
ef
ff
fe
ec
ct
ti
iv
ve
en
ne
es
ss
s.
.

 A
Ac
cc
co
ou
un
nt
ta
ab
bi
il
li
it
ty
y
R
Re
eg
gu
ul
la
at
to
or
ry
y a
ag
ge
en
nc
ci
ie
es
s s
sh
ho
ou
ul
ld
d o
op
pe
er
ra
at
te
e i
in
nd
de
ep
pe
en
nd
de
en
nt
tl
ly
y o
of
f s
se
ec
ct
ti
io
on
na
al
l i
in
nt
te
er
re
es
st
ts
s a
an
nd
d w
wi
it
th
h a
ap
pp
pr
ro
op
pr
ri
ia
at
te
el
ly
y
s
sk
ki
il
ll
le
ed
d s
st
ta
af
ff
f.
. I
In
n a
ad
dd
di
it
ti
io
on
n,
, t
th
he
e r
re
eg
gu
ul
la
at
to
or
ry
y s
st
tr
ru
uc
ct
tu
ur
re
e m
mu
us
st
t b
be
e a
ac
cc
co
ou
un
nt
ta
ab
bl
le
e t
to
o i
it
ts
s s
st
ta
ak
ke
eh
ho
ol
ld
de
er
rs
s a
an
nd
d
s
su
ub
bj
je
ec
ct
t t
to
o r
re
eg
gu
ul
la
ar
r r
re
ev
vi
ie
ew
ws
s o
of
f i
it
ts
s e
ef
ff
fi
ic
ci
ie
en
nc
cy
y a
an
nd
d e
ef
ff
fe
ec
ct
ti
iv
ve
en
ne
es
ss
s.
.
5
5.
.2
2.
. F
Fo
or
rm
ms
s o
of
f F
Fi
in
na
an
nc
ci
ia
al
l R
Re
eg
gu
ul
la
at
ti
io
on
n
M
Mo
os
st
t g
go
ov
ve
er
rn
nm
me
en
nt
ts
s t
th
hr
ro
ou
ug
gh
ho
ou
ut
t t
th
he
e w
wo
or
rl
ld
d r
re
eg
gu
ul
la
at
te
e v
va
ar
ri
io
ou
us
s a
as
sp
pe
ec
ct
ts
s o
of
f f
fi
in
na
an
nc
ci
ia
al
l a
ac
ct
ti
iv
vi
it
ti
ie
es
s b
be
ec
ca
au
us
se
e
t
th
he
ey
y r
re
ec
co
og
gn
ni
iz
ze
e t
th
he
e v
vi
it
ta
al
l r
ro
ol
le
e p
pl
la
ay
ye
ed
d b
by
y a
a c
co
ou
un
nt
tr
ry
y’
’s
s f
fi
in
na
an
nc
ci
ia
al
l s
sy
ys
st
te
em
m.
. A
Al
lt
th
ho
ou
ug
gh
h t
th
he
e d
de
eg
gr
re
ee
e o
of
f
r
re
eg
gu
ul
la
at
ti
io
on
n v
va
ar
ri
ie
es
s f
fr
ro
om
m c
co
ou
un
nt
tr
ry
y t
to
o c
co
ou
un
nt
tr
ry
y,
, r
re
eg
gu
ul
la
at
ti
io
on
n t
ta
ak
ke
es
s o
on
ne
e o
of
f t
th
he
e f
fo
ol
ll
lo
ow
wi
in
ng
g f
fo
ou
ur
r f
fo
or
rm
ms
s:
:
Financial Institutions and Market (Chapter Three)
20
1
1.
. D
Di
is
sc
cl
lo
os
su
ur
re
e r
re
eg
gu
ul
la
at
ti
io
on
n r
re
eq
qu
ui
ir
re
es
s t
th
ha
at
t a
an
ny
y p
pu
ub
bl
li
ic
cl
ly
y t
tr
ra
ad
de
ed
d c
co
om
mp
pa
an
ny
y p
pr
ro
ov
vi
id
de
e f
fi
in
na
an
nc
ci
ia
al
l i
in
nf
fo
or
rm
ma
at
ti
io
on
n
a
an
nd
d n
no
on
nf
fi
in
na
an
nc
ci
ia
al
l i
in
nf
fo
or
rm
ma
at
ti
io
on
n o
on
n a
a t
ti
im
me
el
ly
y b
ba
as
si
is
s t
th
ha
at
t w
wo
ou
ul
ld
d b
be
e e
ex
xp
pe
ec
ct
te
ed
d t
to
o a
af
ff
fe
ec
ct
t t
th
he
e v
va
al
lu
ue
e o
of
f i
it
ts
s
s
se
ec
cu
ur
ri
it
ty
y t
to
o a
ac
ct
tu
ua
al
l a
an
nd
d p
po
ot
te
en
nt
ti
ia
al
l i
in
nv
ve
es
st
to
or
rs
s.
. G
Go
ov
ve
er
rn
nm
me
en
nt
ts
s j
ju
us
st
ti
if
fy
y d
di
is
sc
cl
lo
os
su
ur
re
e r
re
eg
gu
ul
la
at
ti
io
on
n b
by
y p
po
oi
in
nt
ti
in
ng
g
o
ou
ut
t t
th
ha
at
t t
th
he
e i
is
ss
su
ue
er
r h
ha
as
s a
ac
cc
ce
es
ss
s t
to
o b
be
et
tt
te
er
r i
in
nf
fo
or
rm
ma
at
ti
io
on
n a
ab
bo
ou
ut
t t
th
he
e e
ec
co
on
no
om
mi
ic
c w
we
el
ll
l-
-b
be
ei
in
ng
g o
of
f t
th
he
e e
en
nt
ti
it
ty
y
t
th
ha
an
n t
th
ho
os
se
e w
wh
ho
o o
ow
wn
n o
or
r a
ar
re
e c
co
on
nt
te
em
mp
pl
la
at
ti
in
ng
g o
ow
wn
ne
er
rs
sh
hi
ip
p o
of
f t
th
he
e s
se
ec
cu
ur
ri
it
ti
ie
es
s.
. E
Ec
co
on
no
om
mi
is
st
ts
s r
re
ef
fe
er
r t
to
o t
th
hi
is
s
u
un
ne
ev
ve
en
n a
ac
cc
ce
es
ss
s o
or
r u
un
ne
ev
ve
en
n p
po
os
ss
se
es
ss
si
io
on
n o
of
f i
in
nf
fo
or
rm
ma
at
ti
io
on
n a
as
s a
as
sy
ym
mm
me
et
tr
ri
ic
c i
in
nf
fo
or
rm
ma
at
ti
io
on
n.
. I
In
n t
th
he
e U
Un
ni
it
te
ed
d
S
St
ta
at
te
es
s,
, d
di
is
sc
cl
lo
os
su
ur
re
e r
re
eg
gu
ul
la
at
ti
io
on
n i
is
s e
em
mb
be
ed
dd
de
ed
d i
in
n v
va
ar
ri
io
ou
us
s s
se
ec
cu
ur
ri
it
ti
ie
es
s a
ac
ct
ts
s t
th
ha
at
t d
de
el
le
eg
ga
at
te
e t
to
o t
th
he
e S
Se
ec
cu
ur
ri
it
ti
ie
es
s
a
an
nd
d E
Ex
xc
ch
ha
an
ng
ge
e C
Co
om
mm
mi
is
ss
si
io
on
n (
(S
SE
EC
C)
) t
th
he
e r
re
es
sp
po
on
ns
si
ib
bi
il
li
it
ty
y f
fo
or
r g
ga
at
th
he
er
ri
in
ng
g a
an
nd
d p
pu
ub
bl
li
ic
ci
iz
zi
in
ng
g r
re
el
le
ev
va
an
nt
t
i
in
nf
fo
or
rm
ma
at
ti
io
on
n,
, a
an
nd
d f
fo
or
r p
pu
un
ni
is
sh
hi
in
ng
g t
th
ho
os
se
e i
is
ss
su
ue
er
rs
s w
wh
ho
o s
su
up
pp
pl
ly
y f
fr
ra
au
ud
du
ul
le
en
nt
t o
or
r m
mi
is
sl
le
ea
ad
di
in
ng
g d
da
at
ta
a.
.
H
Ho
ow
we
ev
ve
er
r,
, d
di
is
sc
cl
lo
os
su
ur
re
e r
re
eg
gu
ul
la
at
ti
io
on
n d
do
oe
es
s n
no
ot
t a
at
tt
te
em
mp
pt
t t
to
o p
pr
re
ev
ve
en
nt
t t
th
he
e i
is
ss
su
ua
an
nc
ce
e o
of
f r
ri
is
sk
ky
y a
as
ss
se
et
ts
s.
. R
Ra
at
th
he
er
r,
,
t
th
he
e S
SE
EC
C’
’s
s s
so
ol
le
e m
mo
ot
ti
iv
va
at
ti
io
on
n i
is
s t
to
o a
as
ss
su
ur
re
e t
th
ha
at
t i
is
ss
su
ue
er
rs
s s
su
up
pp
pl
ly
y d
di
il
li
ig
ge
en
nt
t a
an
nd
d i
in
nt
te
el
ll
li
ig
ge
en
nt
t i
in
nv
ve
es
st
to
or
rs
s w
wi
it
th
h
t
th
he
e i
in
nf
fo
or
rm
ma
at
ti
io
on
n n
ne
ee
ed
de
ed
d f
fo
or
r a
a f
fa
ai
ir
r e
ev
va
al
lu
ua
at
ti
io
on
n o
of
f t
th
he
e s
se
ec
cu
ur
ri
it
ti
ie
es
s.
.
2
2.
. F
Fi
in
na
an
nc
ci
ia
al
l a
ac
ct
ti
iv
vi
it
ty
y r
re
eg
gu
ul
la
at
ti
io
on
n r
ru
ul
le
es
s a
ab
bo
ou
ut
t t
tr
ra
ad
de
er
rs
s o
of
f s
se
ec
cu
ur
ri
it
ti
ie
es
s a
an
nd
d t
tr
ra
ad
di
in
ng
g o
on
n f
fi
in
na
an
nc
ci
ia
al
l m
ma
ar
rk
ke
et
ts
s
c
co
om
mp
pr
ri
is
se
e.
. P
Pr
ro
ob
ba
ab
bl
ly
y t
th
he
e b
be
es
st
t e
ex
xa
am
mp
pl
le
e o
of
f t
th
hi
is
s t
ty
yp
pe
e o
of
f r
re
eg
gu
ul
la
at
ti
io
on
n i
is
s t
th
he
e s
se
et
t o
of
f r
ru
ul
le
es
s p
pr
ro
oh
hi
ib
bi
it
ti
in
ng
g t
th
he
e
t
tr
ra
ad
di
in
ng
g o
of
f a
a s
se
ec
cu
ur
ri
it
ty
y b
by
y t
th
ho
os
se
e w
wh
ho
o,
, b
be
ec
ca
au
us
se
e o
of
f t
th
he
ei
ir
r p
pr
ri
iv
vi
il
le
eg
ge
ed
d p
po
os
si
it
ti
io
on
n i
in
n a
a c
co
or
rp
po
or
ra
at
ti
io
on
n,
, k
kn
no
ow
w
m
mo
or
re
e a
ab
bo
ou
ut
t t
th
he
e i
is
ss
su
ue
er
r’
’s
s e
ec
co
on
no
om
mi
ic
c p
pr
ro
os
sp
pe
ec
ct
ts
s t
th
ha
an
n t
th
he
e g
ge
en
ne
er
ra
al
l i
in
nv
ve
es
st
ti
in
ng
g p
pu
ub
bl
li
ic
c.
. S
Su
uc
ch
h i
in
nd
di
iv
vi
id
du
ua
al
ls
s
a
ar
re
e i
in
ns
si
id
de
er
rs
s a
an
nd
d i
in
nc
cl
lu
ud
de
e,
, y
ye
et
t a
ar
re
e n
no
ot
t l
li
im
mi
it
te
ed
d t
to
o,
, c
co
or
rp
po
or
ra
at
te
e m
ma
an
na
ag
ge
er
rs
s a
an
nd
d m
me
em
mb
be
er
rs
s o
of
f t
th
he
e b
bo
oa
ar
rd
d o
of
f
d
di
ir
re
ec
ct
to
or
rs
s.
. T
Th
ho
ou
ug
gh
h i
it
t i
is
s n
no
ot
t i
il
ll
le
eg
ga
al
l f
fo
or
r i
in
ns
si
id
de
er
rs
s t
to
o b
bu
uy
y o
or
r s
se
el
ll
l t
th
he
e s
st
to
oc
ck
k o
of
f a
a c
co
om
mp
pa
an
ny
y i
in
n w
wh
hi
ic
ch
h t
th
he
ey
y
a
ar
re
e c
co
on
ns
si
id
de
er
re
ed
d a
an
n i
in
ns
si
id
de
er
r,
, i
il
ll
le
eg
ga
al
l i
in
ns
si
id
de
er
r t
tr
ra
ad
di
in
ng
g i
is
s t
th
he
e t
tr
ra
ad
di
in
ng
g i
in
n a
a s
se
ec
cu
ur
ri
it
ty
y o
of
f a
a c
co
om
mp
pa
an
ny
y b
by
y a
a
p
pe
er
rs
so
on
n w
wh
ho
o i
is
s a
an
n i
in
ns
si
id
de
er
r,
, a
an
nd
d t
th
he
e t
tr
ra
ad
de
e i
is
s b
ba
as
se
ed
d o
on
n m
ma
at
te
er
ri
ia
al
l,
, n
no
on
np
pu
ub
bl
li
ic
c i
in
nf
fo
or
rm
ma
at
ti
io
on
n.
. I
Il
ll
le
eg
ga
al
l
i
in
ns
si
id
de
er
r t
tr
ra
ad
di
in
ng
g i
is
s a
an
no
ot
th
he
er
r p
pr
ro
ob
bl
le
em
m p
po
os
se
ed
d b
by
y a
as
sy
ym
mm
me
et
tr
ri
ic
c i
in
nf
fo
or
rm
ma
at
ti
io
on
n.
. T
Th
he
e S
SE
EC
C i
is
s r
re
es
sp
po
on
ns
si
ib
bl
le
e f
fo
or
r
m
mo
on
ni
it
to
or
ri
in
ng
g t
th
he
e t
tr
ra
ad
de
es
s t
th
ha
at
t c
co
or
rp
po
or
ra
at
te
e o
of
ff
fi
ic
ce
er
rs
s,
, d
di
ir
re
ec
ct
to
or
rs
s,
, a
as
s w
we
el
ll
l a
as
s m
ma
aj
jo
or
r s
st
to
oc
ck
kh
ho
ol
ld
de
er
rs
s,
, e
ex
xe
ec
cu
ut
te
e i
in
n
t
th
he
e s
se
ec
cu
ur
ri
it
ti
ie
es
s o
of
f t
th
he
ei
ir
r f
fi
ir
rm
ms
s.
. A
An
no
ot
th
he
er
r e
ex
xa
am
mp
pl
le
e o
of
f f
fi
in
na
an
nc
ci
ia
al
l a
ac
ct
ti
iv
vi
it
ty
y r
re
eg
gu
ul
la
at
ti
io
on
n i
is
s t
th
he
e s
se
et
t o
of
f r
ru
ul
le
es
s
i
im
mp
po
os
se
ed
d b
by
y t
th
he
e S
SE
EC
C r
re
eg
ga
ar
rd
di
in
ng
g t
th
he
e s
st
tr
ru
uc
ct
tu
ur
re
e a
an
nd
d o
op
pe
er
ra
at
ti
io
on
ns
s o
of
f e
ex
xc
ch
ha
an
ng
ge
es
s w
wh
he
er
re
e s
se
ec
cu
ur
ri
it
ti
ie
es
s t
tr
ra
ad
de
e.
.
T
Th
he
e j
ju
us
st
ti
if
fi
ic
ca
at
ti
io
on
n f
fo
or
r s
su
uc
ch
h r
ru
ul
le
es
s i
is
s t
th
ha
at
t i
it
t r
re
ed
du
uc
ce
es
s t
th
he
e l
li
ik
ke
el
li
ih
ho
oo
od
d t
th
ha
at
t m
me
em
mb
be
er
rs
s o
of
f e
ex
xc
ch
ha
an
ng
ge
es
s m
ma
ay
y
b
be
e a
ab
bl
le
e,
, u
un
nd
de
er
r c
ce
er
rt
ta
ai
in
n c
ci
ir
rc
cu
um
ms
st
ta
an
nc
ce
es
s,
, t
to
o c
co
ol
ll
lu
ud
de
e a
an
nd
d d
de
ef
fr
ra
au
ud
d t
th
he
e g
ge
en
ne
er
ra
al
l i
in
nv
ve
es
st
ti
in
ng
g p
pu
ub
bl
li
ic
c.
. B
Bo
ot
th
h
t
th
he
e S
SE
EC
C a
an
nd
d t
th
he
e s
se
el
lf
f-
-r
re
eg
gu
ul
la
at
to
or
ry
y o
or
rg
ga
an
ni
iz
za
at
ti
io
on
n,
, t
th
he
e F
Fi
in
na
an
nc
ci
ia
al
l I
In
nd
du
us
st
tr
ry
y R
Re
eg
gu
ul
la
at
to
or
ry
y A
Au
ut
th
ho
or
ri
it
ty
y
(
(F
FI
IN
NR
RA
A)
),
, a
ar
re
e r
re
es
sp
po
on
ns
si
ib
bl
le
e f
fo
or
r t
th
he
e r
re
eg
gu
ul
la
at
ti
io
on
n o
of
f m
ma
ar
rk
ke
et
ts
s a
an
nd
d s
se
ec
cu
ur
ri
it
ti
ie
es
s f
fi
ir
rm
ms
s i
in
n t
th
he
e U
Un
ni
it
te
ed
d S
St
ta
at
te
es
s.
.
T
Th
he
e S
SE
EC
C a
an
nd
d t
th
he
e C
Co
om
mm
mo
od
di
it
ty
y F
Fu
ut
tu
ur
re
es
s T
Tr
ra
ad
di
in
ng
g C
Co
om
mm
mi
is
ss
si
io
on
n (
(C
CF
FT
TC
C)
),
, a
an
no
ot
th
he
er
r f
fe
ed
de
er
ra
al
l
g
go
ov
ve
er
rn
nm
me
en
nt
t e
en
nt
ti
it
ty
y,
, s
sh
ha
ar
re
e r
re
es
sp
po
on
ns
si
ib
bi
il
li
it
ty
y f
fo
or
r t
th
he
e f
fe
ed
de
er
ra
al
l r
re
eg
gu
ul
la
at
ti
io
on
n o
of
f t
tr
ra
ad
di
in
ng
g i
in
n o
op
pt
ti
io
on
ns
s,
, f
fu
ut
tu
ur
re
es
s
a
an
nd
d o
ot
th
he
er
r d
de
er
ri
iv
va
at
ti
iv
ve
e i
in
ns
st
tr
ru
um
me
en
nt
ts
s.
. D
De
er
ri
iv
va
at
ti
iv
ve
e i
in
ns
st
tr
ru
um
me
en
nt
ts
s a
ar
re
e s
se
ec
cu
ur
ri
it
ti
ie
es
s w
wh
ho
os
se
e v
va
al
lu
ue
e d
de
ep
pe
en
nd
ds
s o
on
n
a
a s
sp
pe
ec
ci
if
fi
ie
ed
d o
ot
th
he
er
r s
se
ec
cu
ur
ri
it
ty
y o
or
r a
as
ss
se
et
t.
. F
Fo
or
r e
ex
xa
am
mp
pl
le
e,
, a
a c
ca
al
ll
l o
op
pt
ti
io
on
n o
on
n a
a s
st
to
oc
ck
k i
is
s a
a d
de
er
ri
iv
va
at
ti
iv
ve
e s
se
ec
cu
ur
ri
it
ty
y
w
wh
ho
os
se
e v
va
al
lu
ue
e d
de
ep
pe
en
nd
ds
s o
on
n t
th
he
e v
va
al
lu
ue
e o
of
f t
th
he
e u
un
nd
de
er
rl
ly
yi
in
ng
g s
st
to
oc
ck
k;
; i
if
f t
th
he
e v
va
al
lu
ue
e o
of
f t
th
he
e s
st
to
oc
ck
k i
in
nc
cr
re
ea
as
se
es
s,
,
t
th
he
e v
va
al
lu
ue
e o
of
f t
th
he
e c
ca
al
ll
l o
op
pt
ti
io
on
n o
on
n t
th
he
e s
st
to
oc
ck
k i
in
nc
cr
re
ea
as
se
es
s a
as
s w
we
el
ll
l.
.
Financial Institutions and Market (Chapter Three)
21
3
3.
. R
Re
eg
gu
ul
la
at
ti
io
on
n o
of
f f
fi
in
na
an
nc
ci
ia
al
l i
in
ns
st
ti
it
tu
ut
ti
io
on
ns
s i
is
s a
a f
fo
or
rm
m o
of
f g
go
ov
ve
er
rn
nm
me
en
nt
ta
al
l m
mo
on
ni
it
to
or
ri
in
ng
g t
th
ha
at
t r
re
es
st
tr
ri
ic
ct
ts
s t
th
he
ei
ir
r
a
ac
ct
ti
iv
vi
it
ti
ie
es
s.
. S
Su
uc
ch
h r
re
eg
gu
ul
la
at
ti
io
on
n i
is
s j
ju
us
st
ti
if
fi
ie
ed
d b
by
y g
go
ov
ve
er
rn
nm
me
en
nt
ts
s b
be
ec
ca
au
us
se
e o
of
f t
th
he
e v
vi
it
ta
al
l r
ro
ol
le
e p
pl
la
ay
ye
ed
d b
by
y
f
fi
in
na
an
nc
ci
ia
al
l i
in
ns
st
ti
it
tu
ut
ti
io
on
ns
s i
in
n a
a c
co
ou
un
nt
tr
ry
y’
’s
s e
ec
co
on
no
om
my
y.
.
4
4.
. G
Go
ov
ve
er
rn
nm
me
en
nt
t r
re
eg
gu
ul
la
at
ti
io
on
n o
of
f f
fo
or
re
ei
ig
gn
n p
pa
ar
rt
ti
ic
ci
ip
pa
an
nt
ts
s i
in
nv
vo
ol
lv
ve
es
s t
th
he
e i
im
mp
po
os
si
it
ti
io
on
n o
of
f r
re
es
st
tr
ri
ic
ct
ti
io
on
ns
s o
on
n t
th
he
e
r
ro
ol
le
es
s t
th
ha
at
t f
fo
or
re
ei
ig
gn
n f
fi
ir
rm
ms
s c
ca
an
n p
pl
la
ay
y i
in
n a
a c
co
ou
un
nt
tr
ry
y’
’s
s i
in
nt
te
er
rn
na
al
l m
ma
ar
rk
ke
et
t a
an
nd
d t
th
he
e o
ow
wn
ne
er
rs
sh
hi
ip
p o
or
r c
co
on
nt
tr
ro
ol
l o
of
f
f
fi
in
na
an
nc
ci
ia
al
l i
in
ns
st
ti
it
tu
ut
ti
io
on
ns
s.
. A
Al
lt
th
ho
ou
ug
gh
h m
ma
an
ny
y c
co
ou
un
nt
tr
ri
ie
es
s h
ha
av
ve
e t
th
hi
is
s f
fo
or
rm
m o
of
f r
re
eg
gu
ul
la
at
ti
io
on
n,
, t
th
he
er
re
e h
ha
as
s b
be
ee
en
n a
a
t
tr
re
en
nd
d t
to
o l
le
es
ss
se
en
n t
th
he
es
se
e r
re
es
st
tr
ri
ic
ct
ti
io
on
ns
s.
. T
Th
he
e c
cu
ur
rr
re
en
nt
t U
U.
.S
S.
. r
re
eg
gu
ul
la
at
to
or
ry
y s
sy
ys
st
te
em
m i
in
nv
vo
ol
lv
ve
es
s a
an
n a
ar
rr
ra
ay
y o
of
f
i
in
nd
du
us
st
tr
ry
y a
an
nd
d m
ma
ar
rk
ke
et
t-
-f
fo
oc
cu
us
se
ed
d r
re
eg
gu
ul
la
at
to
or
rs
s.
. T
Th
ho
ou
ug
gh
h t
th
he
e s
sp
pe
ec
ci
if
fi
ic
cs
s o
of
f f
fi
in
na
an
nc
ci
ia
al
l r
re
eg
gu
ul
la
at
to
or
ry
y r
re
ef
fo
or
rm
m a
ar
re
e
n
no
ot
t d
de
et
te
er
rm
mi
in
ne
ed
d a
at
t t
th
he
e t
ti
im
me
e o
of
f t
th
hi
is
s w
wr
ri
it
ti
in
ng
g,
, t
th
he
er
re
e a
ar
re
e s
se
ev
ve
er
ra
al
l e
el
le
em
me
en
nt
ts
s o
of
f r
re
ef
fo
or
rm
m t
th
ha
at
t a
ap
pp
pe
ea
ar
r i
in
n t
th
he
e
m
ma
aj
jo
or
r p
pr
ro
op
po
os
sa
al
ls
s:
: A
An
n a
ad
dv
va
an
nc
ce
ed
d-
-w
wa
ar
rn
ni
in
ng
g s
sy
ys
st
te
em
m,
, w
wh
hi
ic
ch
h w
wo
ou
ul
ld
d a
at
tt
te
em
mp
pt
t t
to
o i
id
de
en
nt
ti
if
fy
y s
sy
ys
st
te
em
mi
ic
c r
ri
is
sk
ks
s
b
be
ef
fo
or
re
e t
th
he
ey
y a
af
ff
fe
ec
ct
t t
th
he
e g
ge
en
ne
er
ra
al
l e
ec
co
on
no
om
my
y.
.
›
› I
In
nc
cr
re
ea
as
se
ed
d t
tr
ra
an
ns
sp
pa
ar
re
en
nc
cy
y i
in
n c
co
on
ns
su
um
me
er
r f
fi
in
na
an
nc
ce
e,
, m
mo
or
rt
tg
ga
ag
ge
e b
br
ro
ok
ke
er
ra
ag
ge
e,
, a
an
nd
d a
as
ss
se
et
t b
ba
ac
ck
ke
ed
d
s
se
ec
cu
ur
ri
it
ti
ie
es
s,
, a
an
nd
d c
co
om
mp
pl
le
ex
x s
se
ec
cu
ur
ri
it
ti
ie
es
s.
.
›
› I
In
nc
cr
re
ea
as
se
ed
d t
tr
ra
an
ns
sp
pa
ar
re
en
nc
cy
y o
of
f c
cr
re
ed
di
it
t-
-r
ra
at
ti
in
ng
g f
fi
ir
rm
ms
s:
: E
En
nh
ha
an
nc
ce
ed
d c
co
on
ns
su
um
me
er
r p
pr
ro
ot
te
ec
ct
ti
io
on
ns
s.
.
›
› I
In
nc
cr
re
ea
as
se
ed
d r
re
eg
gu
ul
la
at
ti
io
on
n o
of
f n
no
on
nb
ba
an
nk
k l
le
en
nd
de
er
rs
s.
. S
So
om
me
e m
me
ea
as
su
ur
re
e t
to
o a
ad
dd
dr
re
es
ss
s t
th
he
e i
is
ss
su
ue
e o
of
f f
fi
in
na
an
nc
ci
ia
al
l
i
in
ns
st
ti
it
tu
ut
ti
io
on
ns
s t
th
ha
at
t m
ma
ay
y b
be
e s
so
o l
la
ar
rg
ge
e t
th
ha
at
t t
th
he
ei
ir
r f
fi
in
na
an
nc
ci
ia
al
l d
di
is
st
tr
re
es
ss
s a
af
ff
fe
ec
ct
ts
s t
th
he
e r
re
es
st
t o
of
f t
th
he
e e
ec
co
on
no
om
my
y.
.
5
5.
.3
3.
. A
Ar
rg
gu
um
me
en
nt
ts
s f
fo
or
r a
an
nd
d a
ag
ga
ai
in
ns
st
t F
Fi
in
na
an
nc
ci
ia
al
l S
Sy
ys
st
te
em
m R
Re
eg
gu
ul
la
at
ti
io
on
n
T
Th
he
er
re
e a
ar
re
e d
d/
/t
t v
vi
ie
ew
ws
s a
as
s t
to
o t
th
he
e n
ne
ee
ed
d a
an
nd
d e
ex
xt
te
en
nt
t o
of
f g
go
ov
v’
’t
t i
in
nt
te
er
rv
ve
en
nt
ti
io
on
n i
in
n f
fi
in
na
an
nc
ci
ia
al
l m
ma
ar
rk
ke
et
ts
s.
. S
So
om
me
e
a
ar
rg
gu
ue
e t
th
ha
at
t f
fr
re
ee
e a
an
nd
d c
co
om
mp
pe
et
ti
it
ti
iv
ve
e m
ma
ar
rk
ke
et
ts
s c
ca
an
n p
pr
ro
od
du
uc
ce
e a
an
n e
ef
ff
fi
ic
ci
ie
en
nt
t a
al
ll
lo
oc
ca
at
ti
io
on
n o
of
f r
re
es
so
ou
ur
rc
ce
es
s a
an
nd
d
p
pr
ro
ov
vi
id
de
e a
a s
st
tr
ro
on
ng
g f
fo
ou
un
nd
da
at
ti
io
on
n f
fo
or
r e
ec
co
on
no
om
mi
ic
c g
gr
ro
ow
wt
th
h a
an
nd
d d
de
ev
ve
el
lo
op
pm
me
en
nt
t.
. O
Ot
th
he
er
rs
s e
em
mp
ph
ha
as
si
iz
ze
e o
on
n t
th
he
e
G
Go
ov
v’
’t
ts
s c
co
ou
ul
ld
d p
pl
la
ay
y i
in
n m
ma
ai
in
nt
ta
ai
in
ni
in
ng
g a
a h
he
ea
al
lt
th
hy
y e
ec
co
on
no
om
mi
ic
c a
an
nd
d s
so
oc
ci
ia
al
l e
en
nv
vi
ir
ro
on
nm
me
en
nt
t i
in
n w
wh
hi
ic
ch
h e
en
nt
te
er
rp
pr
ri
is
se
es
s
a
an
nd
d t
th
he
ei
ir
r c
cu
us
st
to
om
me
er
rs
s c
ca
an
n i
in
nt
te
er
ra
ac
ct
t w
wi
it
th
h c
co
on
nf
fi
id
de
en
nc
ce
e.
.
T
Th
he
e f
fo
ol
ll
lo
ow
wi
in
ng
g a
ar
re
e s
so
om
me
e o
of
f t
th
he
e v
vi
ie
ew
ws
s f
fo
or
r o
or
r a
ag
ga
ai
in
ns
st
t f
fi
in
na
an
nc
ci
ia
al
l m
ma
ar
rk
ke
et
t r
re
eg
gu
ul
la
at
ti
io
on
ns
s:
:

 R
Re
eg
gu
ul
la
at
ti
io
on
n f
fo
or
r F
Fi
in
na
an
nc
ci
ia
al
l S
Sa
af
fe
et
ty
y
M
Ma
an
ny
y r
re
eg
gu
ul
la
at
ti
io
on
ns
s i
in
n t
th
he
e f
fi
in
na
an
nc
ci
ia
al
l i
in
ns
st
ti
it
tu
ut
ti
io
on
ns
s’
’ s
se
ec
ct
to
or
r s
sp
pr
ri
in
ng
g f
fr
ro
om
m t
th
he
e a
ab
bi
il
li
it
ty
y o
of
f s
so
om
me
e f
fi
in
na
an
nc
ci
ia
al
l
i
in
ns
st
ti
it
tu
ut
ti
io
on
ns
s t
to
o c
cr
re
ea
at
te
e m
mo
on
ne
ey
y i
in
n t
th
he
e f
fo
or
rm
m o
of
f c
cr
re
ed
di
it
t c
ca
ar
rd
ds
s,
, c
ch
he
ec
ck
ka
ab
bl
le
e d
de
ep
po
os
si
it
ts
s,
, a
an
nd
d o
ot
th
he
er
r a
ac
cc
co
ou
un
nt
ts
s
t
th
ha
at
t c
ca
an
n b
be
e u
us
se
ed
d t
to
o m
ma
ak
ke
e p
pa
ay
ym
me
en
nt
ts
s f
fo
or
r p
pu
ur
rc
ch
ha
as
se
e o
of
f g
go
oo
od
ds
s a
an
nd
d s
se
er
rv
vi
ic
ce
es
s.
. S
Su
uc
ch
h c
cr
re
ea
at
ti
io
on
n o
of
f m
mo
on
ne
ey
y
i
is
s c
cl
lo
os
se
el
ly
y a
as
ss
so
oc
ci
ia
at
te
ed
d w
wi
it
th
h i
in
nf
fl
la
at
ti
io
on
n w
wh
hi
ic
ch
h s
sh
ho
ou
ul
ld
d b
be
e m
ma
an
na
ag
ge
ed
d b
by
y t
th
he
e g
go
ov
v’
’t
t.
.
F
Fi
in
na
an
nc
ci
ia
al
l r
re
eg
gu
ul
la
at
ti
io
on
n a
ar
ri
is
se
es
s f
fr
ro
om
m t
th
he
e r
ri
is
sk
ks
s a
at
tt
ta
ac
ch
hi
in
ng
g t
to
o f
fi
in
na
an
nc
ci
ia
al
l p
pr
ro
om
mi
is
se
es
s.
. W
Wh
hi
il
le
e i
in
n s
so
om
me
e o
ot
th
he
er
r
i
in
nd
du
us
st
tr
ri
ie
es
s s
sa
af
fe
et
ty
y r
re
eg
gu
ul
la
at
ti
io
on
n a
ai
im
ms
s t
to
o e
el
li
im
mi
in
na
at
te
e r
ri
is
sk
k a
al
lm
mo
os
st
t e
en
nt
ti
ir
re
el
ly
y (
(f
fo
or
r e
ex
xa
am
mp
pl
le
e,
, t
to
o e
el
li
im
mi
in
na
at
te
e
h
he
ea
al
lt
th
h r
ri
is
sk
ks
s i
in
n f
fo
oo
od
d p
pr
re
ep
pa
ar
ra
at
ti
io
on
n)
),
, t
th
hi
is
s i
is
s n
no
ot
t a
an
n a
ap
pp
pr
ro
op
pr
ri
ia
at
te
e a
ai
im
m f
fo
or
r m
mo
os
st
t a
ar
re
ea
as
s o
of
f t
th
he
e f
fi
in
na
an
nc
ci
ia
al
l
a
ac
ct
ti
iv
vi
it
ti
ie
es
s.
. O
On
ne
e o
of
f t
th
he
e v
vi
it
ta
al
l e
ec
co
on
no
om
mi
ic
c f
fu
un
nc
ct
ti
io
on
ns
s o
of
f t
th
he
e f
fi
in
na
an
nc
ci
ia
al
l i
in
ns
st
ti
it
tu
ut
ti
io
on
ns
s i
is
s t
to
o m
ma
an
na
ag
ge
e,
,
a
al
ll
lo
oc
ca
at
te
e a
an
nd
d p
pr
ri
ic
ce
e r
ri
is
sk
k.
. H
Ho
ow
we
ev
ve
er
r,
, t
th
he
er
re
e a
ar
re
e s
so
om
me
e a
ar
re
ea
as
s o
of
f t
th
he
e f
fi
in
na
an
nc
ci
ia
al
l a
ac
ct
ti
iv
vi
it
ti
ie
es
s w
wh
he
er
re
e
g
go
ov
ve
er
rn
nm
me
en
nt
t i
in
nt
te
er
rv
ve
en
nt
ti
io
on
n i
is
s a
ai
im
me
ed
d a
at
t e
el
li
im
mi
in
na
at
te
e r
re
ed
du
uc
ci
in
ng
g r
ri
is
sk
k.
. O
On
ne
e o
of
f t
th
he
e m
mo
os
st
t d
di
if
ff
fi
ic
cu
ul
lt
t t
ta
as
sk
ks
s
Financial Institutions and Market (Chapter Three)
22
f
fa
ac
ci
in
ng
g t
th
ho
os
se
e c
ch
ha
ar
rg
ge
ed
d w
wi
it
th
h d
de
es
si
ig
gn
ni
in
ng
g f
fi
in
na
an
nc
ci
ia
al
l m
ma
ar
rk
ke
et
t r
re
eg
gu
ul
la
at
ti
io
on
ns
s i
is
s t
th
ha
at
t o
of
f d
de
ef
fi
in
ni
in
ng
g t
th
he
e a
ai
im
ms
s
a
an
nd
d b
bo
ou
un
nd
da
ar
ri
ie
es
s o
of
f r
re
eg
gu
ul
la
at
ti
io
on
n f
fo
or
r f
fi
in
na
an
nc
ci
ia
al
l s
sa
af
fe
et
ty
y.
. I
In
n e
es
ss
se
en
nc
ce
e,
, t
th
he
e t
ta
as
sk
k i
is
s t
to
o d
de
ec
ci
id
de
e w
wh
hi
ic
ch
h
f
fi
in
na
an
nc
ci
ia
al
l p
pr
ro
om
mi
is
se
es
s h
ha
av
ve
e c
ch
ha
ar
ra
ac
ct
te
er
ri
is
st
ti
ic
cs
s t
th
ha
at
t w
wa
ar
rr
ra
an
nt
t m
mu
uc
ch
h h
hi
ig
gh
he
er
r l
le
ev
ve
el
ls
s o
of
f s
sa
af
fe
et
ty
y t
th
ha
an
n w
wo
ou
ul
ld
d
o
ot
th
he
er
rw
wi
is
se
e b
be
e p
pr
ro
ov
vi
id
de
ed
d b
by
y m
ma
ar
rk
ke
et
ts
s (
(e
ev
ve
en
n w
wh
he
en
n t
th
he
ey
y a
ar
re
e s
su
ub
bj
je
ec
ct
t t
to
o e
ef
ff
fe
ec
ct
ti
iv
ve
e c
co
on
nd
du
uc
ct
t,
, d
di
is
sc
cl
lo
os
su
ur
re
e
a
an
nd
d c
co
om
mp
pe
et
ti
it
ti
io
on
n r
re
eg
gu
ul
la
at
ti
io
on
n)
).
.
A
As
s a
a g
ge
en
ne
er
ra
al
l p
pr
ri
in
nc
ci
ip
pl
le
e,
, f
fi
in
na
an
nc
ci
ia
al
l s
sa
af
fe
et
ty
y r
re
eg
gu
ul
la
at
ti
io
on
n w
wi
il
ll
l b
be
e r
re
eq
qu
ui
ir
re
ed
d w
wh
he
er
re
e p
pr
ro
om
mi
is
se
es
s a
ar
re
e j
ju
ud
dg
ge
ed
d
t
to
o b
be
e v
ve
er
ry
y d
di
if
ff
fi
ic
cu
ul
lt
t t
to
o h
ho
on
no
or
r a
an
nd
d a
as
ss
se
es
ss
s,
, a
an
nd
d p
pr
ro
od
du
uc
ce
e h
hi
ig
gh
hl
ly
y a
ad
dv
ve
er
rs
se
e c
co
on
ns
se
eq
qu
ue
en
nc
ce
es
s i
if
f b
br
re
ea
ac
ch
he
ed
d.
.
P
Pr
ro
om
mi
is
se
es
s w
wh
hi
ic
ch
h r
ra
an
nk
k h
hi
ig
gh
hl
ly
y o
on
n t
th
he
es
se
e c
ch
ha
ar
ra
ac
ct
te
er
ri
is
st
ti
ic
cs
s a
ar
re
e r
re
ef
fe
er
rr
re
ed
d t
to
o a
as
s h
ha
av
vi
in
ng
g a
a h
hi
ig
gh
h ‘
‘i
in
nt
te
en
ns
si
it
ty
y’
’.
.
T
Th
he
e h
hi
ig
gh
he
er
r t
th
he
e i
in
nt
te
en
ns
si
it
ty
y o
of
f a
a p
pr
ro
om
mi
is
se
e,
, t
th
he
e s
st
tr
ro
on
ng
ge
er
r t
th
he
e c
ca
as
se
e f
fo
or
r r
re
eg
gu
ul
la
at
ti
io
on
n t
to
o r
re
ed
du
uc
ce
e t
th
he
e
l
li
ik
ke
el
li
ih
ho
oo
od
d o
of
f b
br
re
ea
ac
ch
h.
.
i
i.
. S
Sy
ys
st
te
em
mi
ic
c S
St
ta
ab
bi
il
li
it
ty
y
T
Th
he
e f
fi
ir
rs
st
t c
ca
as
se
e f
fo
or
r r
re
eg
gu
ul
la
at
ti
io
on
n t
to
o p
pr
re
ev
ve
en
nt
t s
sy
ys
st
te
em
mi
ic
c i
in
ns
st
ta
ab
bi
il
li
it
ty
y a
ar
ri
is
se
es
s b
b/
/s
se
e c
ce
er
rt
ta
ai
in
n f
fi
in
na
an
nc
ci
ia
al
l
p
pr
ro
om
mi
is
se
es
s h
ha
av
ve
e a
an
n i
in
nh
he
er
re
en
nt
t c
ca
ap
pa
ac
ci
it
ty
y t
to
o t
tr
ra
an
ns
sm
mi
it
t i
in
ns
st
ta
ab
bi
il
li
it
ty
y t
to
o t
th
he
e r
re
ea
al
l e
ec
co
on
no
om
my
y,
, i
in
nd
du
uc
ci
in
ng
g
u
un
nd
de
es
si
ir
re
ed
d e
ef
ff
fe
ec
ct
ts
s o
on
n o
ou
ut
tp
pu
ut
t,
, e
em
mp
pl
lo
oy
ym
me
en
nt
t a
an
nd
d p
pr
ri
ic
ce
e i
in
nf
fl
la
at
ti
io
on
n.
. T
Th
he
e m
mo
or
re
e s
so
op
ph
hi
is
st
ti
ic
ca
at
te
ed
d t
th
he
e
e
ec
co
on
no
om
my
y,
, t
th
he
e g
gr
re
ea
at
te
er
r i
it
ts
s d
de
ep
pe
en
nd
de
en
nc
ce
e o
on
n f
fi
in
na
an
nc
ci
ia
al
l p
pr
ro
om
mi
is
se
es
s a
an
nd
d t
th
he
e g
gr
re
ea
at
te
er
r i
it
ts
s
v
vu
ul
ln
ne
er
ra
ab
bi
il
li
it
ty
y t
to
o f
fa
ai
il
lu
ur
re
e o
of
f t
th
he
e f
fi
in
na
an
nc
ci
ia
al
l s
sy
ys
st
te
em
m.
.
T
Th
he
e s
st
tr
ro
on
ng
ge
es
st
t s
so
ou
ur
rc
ce
e o
of
f s
sy
ys
st
te
em
mi
ic
c r
ri
is
sk
k i
is
s f
fi
in
na
an
nc
ci
ia
al
l i
in
nf
fe
ec
ct
ti
io
on
n.
. T
Th
hi
is
s o
oc
cc
cu
ur
rs
s w
wh
he
en
n f
fi
in
na
an
nc
ci
ia
al
l
d
di
is
st
tr
re
es
ss
s i
in
n o
on
ne
e m
ma
ar
rk
ke
et
t o
or
r i
in
ns
st
ti
it
tu
ut
ti
io
on
n i
is
s c
co
om
mm
mu
un
ni
ic
ca
at
te
ed
d t
to
o o
ot
th
he
er
rs
s a
an
nd
d,
, e
ev
ve
en
nt
tu
ua
al
ll
ly
y,
, e
en
ng
gu
ul
lf
fs
s
t
th
he
e e
en
nt
ti
ir
re
e s
sy
ys
st
te
em
m.
. T
Th
he
e p
po
os
si
it
ti
io
on
n o
of
f b
ba
an
nk
ks
s a
as
s t
th
he
e m
ma
ai
in
n p
pr
ro
ov
vi
id
de
er
rs
s o
of
f p
pa
ay
ym
me
en
nt
ts
s s
se
er
rv
vi
ic
ce
es
s a
ad
dd
ds
s
t
to
o r
ri
is
sk
k t
th
ha
at
t b
ba
an
nk
k f
fa
ai
il
lu
ur
re
e m
mi
ig
gh
ht
t d
di
is
sr
ru
up
pt
t t
th
he
e i
in
nt
te
eg
gr
ri
it
ty
y o
of
f t
th
he
e p
pa
ay
ym
me
en
nt
ts
s s
sy
ys
st
te
em
m a
an
nd
d p
pr
re
ec
ci
ip
pi
it
ta
at
te
e
a
a w
wi
id
de
er
r e
ec
co
on
no
om
mi
ic
c c
cr
ri
is
si
is
s.
.
i
ii
i.
. I
In
nf
fo
or
rm
ma
at
ti
io
on
n A
As
sy
ym
mm
me
et
tr
ry
y
T
Th
he
e s
se
ec
co
on
nd
d c
ca
as
se
e f
fo
or
r r
re
eg
gu
ul
la
at
ti
io
on
n r
re
el
la
at
te
es
s t
to
o t
th
he
e n
ne
ee
ed
d t
to
o a
ad
dd
dr
re
es
ss
s i
in
nf
fo
or
rm
ma
at
ti
io
on
n a
as
sy
ym
mm
me
et
tr
ry
y.
. I
In
n a
a
m
ma
ar
rk
ke
et
t e
ec
co
on
no
om
my
y,
, c
co
on
ns
su
um
me
er
rs
s a
ar
re
e a
as
ss
su
um
me
ed
d,
, f
fo
or
r t
th
he
e m
mo
os
st
t p
pa
ar
rt
t,
, t
to
o t
th
he
e b
be
es
st
t j
ju
ud
dg
ge
es
s o
of
f t
th
he
ei
ir
r
o
ow
wn
n i
in
nt
te
er
re
es
st
ts
s.
. I
In
n s
su
uc
ch
h c
ca
as
se
es
s,
, d
di
is
sc
cl
lo
os
su
ur
re
e r
re
eq
qu
ui
ir
re
em
me
en
nt
ts
s p
pl
la
ay
y a
an
n i
im
mp
po
or
rt
ta
an
nt
t r
ro
ol
le
e i
in
n a
as
ss
si
is
st
ti
in
ng
g
c
co
on
ns
su
um
me
er
rs
s t
to
o m
ma
ak
ke
e i
in
nf
fo
or
rm
me
ed
d j
ju
ud
dg
gm
me
en
nt
ts
s.
. H
Ho
ow
we
ev
ve
er
r,
, d
di
is
sc
cl
lo
os
su
ur
re
e i
is
s n
no
ot
t a
al
lw
wa
ay
ys
s s
su
uf
ff
fi
ic
ci
ie
en
nt
t.
.
F
Fo
or
r m
ma
an
ny
y f
fi
in
na
an
nc
ci
ia
al
l p
pr
ro
od
du
uc
ct
ts
s,
, c
co
on
ns
su
um
me
er
rs
s l
la
ac
ck
k (
(a
an
nd
d c
ca
an
nn
no
ot
t e
ef
ff
fi
ic
ci
ie
en
nt
tl
ly
y o
ob
bt
ta
ai
in
n)
) t
th
he
e
k
kn
no
ow
wl
le
ed
dg
ge
e,
, e
ex
xp
pe
er
ri
ie
en
nc
ce
e o
or
r j
ju
ud
dg
gm
me
en
nt
t r
re
eq
qu
ui
ir
re
ed
d t
to
o m
ma
ak
ke
e d
di
is
sc
cl
lo
os
su
ur
re
e,
, n
no
o m
ma
at
tt
te
er
r h
ho
ow
w h
hi
ig
gh
h
q
qu
ua
al
li
it
ty
y o
or
r c
co
om
mp
pr
re
eh
he
en
ns
si
iv
ve
e,
, c
ca
an
nn
no
ot
t o
ov
ve
er
rc
co
om
me
e m
ma
ar
rk
ke
et
t f
fa
ai
il
lu
ur
re
e.
.
I
In
n t
th
he
es
se
e c
ca
as
se
es
s,
, i
it
t m
ma
ay
y b
be
e d
de
es
si
ir
ra
ab
bl
le
e t
to
o s
su
ub
bs
st
ti
it
tu
ut
te
e t
th
he
e o
op
pi
in
ni
io
on
n o
of
f a
a t
th
hi
ir
rd
d p
pa
ar
rt
ty
y f
fo
or
r t
th
ha
at
t o
of
f
c
co
on
ns
su
um
me
er
rs
s t
th
he
em
ms
se
el
lv
ve
es
s.
. I
In
n e
ef
ff
fe
ec
ct
t,
, t
th
he
e t
th
hi
ir
rd
d p
pa
ar
rt
ty
y i
is
s e
ex
xp
pe
ec
ct
te
ed
d t
to
o b
be
eh
ha
av
ve
e p
pa
at
te
er
rn
na
al
li
is
st
ti
ic
ca
al
ll
ly
y,
,
l
lo
oo
ok
ki
in
ng
g o
ou
ut
t f
fo
or
r t
th
he
e b
be
es
st
t i
in
nt
te
er
re
es
st
ts
s o
of
f c
co
on
ns
su
um
me
er
rs
s w
wh
he
en
n t
th
he
ey
y a
ar
re
e c
co
on
ns
si
id
de
er
re
ed
d i
in
nc
ca
ap
pa
ab
bl
le
e o
of
f
d
do
oi
in
ng
g s
so
o a
al
lo
on
ne
e.
. T
To
o s
so
om
me
e e
ex
xt
te
en
nt
t,
, s
su
uc
ch
h t
th
hi
ir
rd
d p
pa
ar
rt
ti
ie
es
s c
ca
an
n b
be
e s
su
up
pp
pl
li
ie
ed
d b
by
y m
ma
ar
rk
ke
et
ts
s (
(s
su
uc
ch
h a
as
s t
th
he
e
Financial Institutions and Market (Chapter Three)
23
r
ro
ol
le
e p
pl
la
ay
ye
ed
d b
by
y s
se
el
lf
f r
re
eg
gu
ul
la
at
to
or
ry
y a
as
ss
so
oc
ci
ia
at
ti
io
on
ns
s)
).
. H
Ho
ow
we
ev
ve
er
r,
, f
fo
or
r m
ma
an
ny
y y
ye
ea
ar
rs
s t
th
he
e p
pr
ra
ac
ct
ti
ic
ce
e i
in
n a
al
ll
l
c
co
ou
un
nt
tr
ri
ie
es
s h
ha
as
s b
be
ee
en
n f
fo
or
r g
go
ov
v’
’t
t p
pr
ru
ud
de
en
nt
ti
ia
al
l r
re
eg
gu
ul
la
at
to
or
rs
s t
to
o t
ta
ak
ke
e o
on
n m
mu
uc
ch
h o
of
f t
th
hi
is
s r
ro
ol
le
e.
.

 R
Re
eg
gu
ul
la
at
to
or
ry
y A
As
ss
su
ur
ra
an
nc
ce
e
A
A c
co
on
nc
ce
er
rn
n a
ab
bo
ou
ut
t t
th
he
e s
sa
af
fe
et
ty
y o
of
f t
th
he
e p
pu
ub
bl
li
ic
c’
’s
s f
fu
un
nd
ds
s,
, e
es
sp
pe
ec
ci
ia
al
ll
ly
y t
th
he
e s
sa
av
vi
in
ng
gs
s o
ow
wn
ne
ed
d b
by
y m
mi
il
ll
li
io
on
ns
s o
of
f
i
in
nd
di
iv
vi
id
du
ua
al
ls
s a
an
nd
d f
fa
am
mi
il
li
ie
es
s,
, h
ho
ow
we
ev
ve
er
r,
, d
do
oe
es
s n
no
ot
t m
me
ea
an
n t
th
ha
at
t a
al
ll
l f
fi
in
na
an
nc
ci
ia
al
l s
se
er
rv
vi
ic
ce
es
s s
sh
ho
ou
ul
ld
d b
be
e s
su
ub
bj
je
ec
ct
t
t
to
o f
fi
in
na
an
nc
ci
ia
al
l s
sa
af
fe
et
ty
y r
re
eg
gu
ul
la
at
ti
io
on
n.
. I
If
f r
re
eg
gu
ul
la
at
ti
io
on
n i
is
s p
pu
ur
rs
su
ue
ed
d t
to
o t
th
he
e p
po
oi
in
nt
t o
of
f e
en
ns
su
ur
ri
in
ng
g t
th
ha
at
t p
pr
ro
om
mi
is
se
es
s a
ar
re
e
k
ke
ep
pt
t u
un
nd
de
er
r a
al
ll
l c
ci
ir
rc
cu
um
ms
st
ta
an
nc
ce
es
s,
, t
th
he
e b
bu
ur
rd
de
en
n o
of
f h
ho
on
no
or
r i
is
s e
ef
ff
fe
ec
ct
ti
iv
ve
el
ly
y s
sh
hi
if
ft
te
ed
d f
fr
ro
om
m t
th
he
e p
pr
ro
om
mi
is
so
or
r t
to
o
t
th
he
e r
re
eg
gu
ul
la
at
to
or
r.
. A
Al
ll
l p
pr
ro
om
mi
is
so
or
rs
s w
wo
ou
ul
ld
d b
be
ec
co
om
me
e e
eq
qu
ua
al
ll
ly
y r
ri
is
sk
ky
y (
(o
or
r r
ri
is
sk
k f
fr
re
ee
e)
) i
in
n t
th
he
e e
ey
ye
es
s o
of
f t
th
he
e
i
in
nv
ve
es
st
ti
in
ng
g p
pu
ub
bl
li
ic
c.
. R
Re
eg
gu
ul
la
at
ti
io
on
n a
at
t t
th
hi
is
s i
in
nt
te
en
ns
si
it
ty
y r
re
em
mo
ov
ve
es
s t
th
he
e n
na
at
tu
ur
ra
al
l s
sp
pe
ec
ct
tr
ru
um
m o
of
f r
ri
is
sk
k t
th
ha
at
t i
is
s
f
fu
un
nd
da
am
me
en
nt
ta
al
l t
to
o f
fi
in
na
an
nc
ci
ia
al
l m
ma
ar
rk
ke
et
ts
s.
. I
If
f i
it
t w
we
er
re
e e
ex
xt
te
en
nd
de
ed
d w
wi
id
de
el
ly
y,
, t
th
he
e c
co
om
mm
mu
un
ni
it
ty
y w
wo
ou
ul
ld
d b
be
e
c
co
ol
ll
le
ec
ct
ti
iv
ve
el
ly
y u
un
nd
de
er
rw
wr
ri
it
ti
in
ng
g a
al
ll
l f
fi
in
na
an
nc
ci
ia
al
l r
ri
is
sk
ks
s t
th
hr
ro
ou
ug
gh
h t
th
he
e t
ta
ax
x s
sy
ys
st
te
em
m,
, a
an
nd
d m
ma
ar
rk
ke
et
ts
s w
wo
ou
ul
ld
d c
ce
ea
as
se
e t
to
o
w
wo
or
rk
k e
ef
ff
fi
ic
ci
ie
en
nt
tl
ly
y.
.
T
Th
hu
us
s,
, r
re
eg
gu
ul
la
at
ti
io
on
n c
ca
an
nn
no
ot
t a
an
nd
d s
sh
ho
ou
ul
ld
d n
no
ot
t e
en
ns
su
ur
re
e t
th
ha
at
t a
al
ll
l f
fi
in
na
an
nc
ci
ia
al
l p
pr
ro
om
mi
is
se
es
s a
ar
re
e k
ke
ep
pt
t.
. T
Th
he
e g
go
ov
v’
’t
t
s
sh
ho
ou
ul
ld
d n
no
ot
t p
pr
ro
ov
vi
id
de
e a
an
n a
ab
bs
so
ol
lu
ut
te
e g
gu
ua
ar
ra
an
nt
te
ee
e i
in
n a
an
ny
y a
ar
re
ea
a o
of
f t
th
he
e f
fi
in
na
an
nc
ci
ia
al
l s
sy
ys
st
te
em
m (
(j
ju
us
st
t a
as
s i
it
t d
do
oe
es
s n
no
ot
t
d
do
o s
so
o i
in
n o
ot
th
he
er
r a
ar
re
ea
as
s)
).
. P
Pr
ri
im
ma
ar
ry
y r
re
es
sp
po
on
ns
si
ib
bi
il
li
it
ty
y s
sh
ho
ou
ul
ld
d r
re
em
ma
ai
in
n w
wi
it
th
h t
th
ho
os
se
e w
wh
ho
o m
ma
ak
ke
e f
fi
in
na
an
nc
ci
ia
al
l
p
pr
ro
om
mi
is
se
es
s.
. I
It
t w
wo
ou
ul
ld
d b
be
e i
in
ne
eq
qu
ui
it
ta
ab
bl
le
e f
fo
or
r t
th
he
e g
go
ov
v’
’t
t t
to
o u
un
nd
de
er
rw
wr
ri
it
te
e s
so
om
me
e f
fi
in
na
an
nc
ci
ia
al
l p
pr
ro
om
mi
is
se
es
s b
bu
ut
t n
no
ot
t
o
ot
th
he
er
r p
pr
ro
om
mi
is
se
es
s m
ma
ad
de
e b
by
y p
pa
ar
rt
ti
ic
ci
ip
pa
an
nt
ts
s i
in
n t
th
he
e b
br
ro
oa
ad
de
er
r e
ec
co
on
no
om
my
y.
.
H
Ho
ow
w i
in
nt
te
en
ns
si
iv
ve
el
ly
y,
, t
th
he
en
n,
, s
sh
ho
ou
ul
ld
d f
fi
in
na
an
nc
ci
ia
al
l s
sa
af
fe
et
ty
y r
re
eg
gu
ul
la
at
ti
io
on
n b
be
e a
ap
pp
pl
li
ie
ed
d?
? H
Ho
ow
w m
mu
uc
ch
h r
re
eg
gu
ul
la
at
to
or
ry
y
a
as
ss
su
ur
ra
an
nc
ce
e s
sh
ho
ou
ul
ld
d i
it
t p
pr
ro
ov
vi
id
de
e i
in
n t
th
he
e v
va
ar
ri
io
ou
us
s a
ar
re
ea
as
s o
of
f t
th
he
e f
fi
in
na
an
nc
ci
ia
al
l s
sy
ys
st
te
em
m?
? A
An
nd
d o
ot
th
he
er
r q
qu
ue
es
st
ti
io
on
ns
s
a
ar
re
e s
st
ti
il
ll
l a
a p
po
oi
in
nt
t o
of
f d
di
is
sc
cu
us
ss
si
io
on
n.
. T
Th
he
eo
or
re
et
ti
ic
ca
al
ll
ly
y,
, h
ho
ow
we
ev
ve
er
r,
, t
th
he
e i
in
nt
te
en
ns
si
it
ty
y o
of
f f
fi
in
na
an
nc
ci
ia
al
l s
sa
af
fe
et
ty
y
r
re
eg
gu
ul
la
at
ti
io
on
n s
sh
ho
ou
ul
ld
d b
be
e p
pr
ro
op
po
or
rt
ti
io
on
na
al
l t
to
o t
th
he
e i
in
nt
te
en
ns
si
it
ty
y o
of
f f
fi
in
na
an
nc
ci
ia
al
l p
pr
ro
om
mi
is
se
es
s.
.
T
Th
he
e m
mo
os
st
t i
in
nt
te
en
ns
se
e f
fi
in
na
an
nc
ci
ia
al
l p
pr
ro
om
mi
is
se
es
s a
ar
re
e t
th
ho
os
se
e w
wh
hi
ic
ch
h p
pr
ro
ov
vi
id
de
e p
pa
ay
ym
me
en
nt
ts
s s
se
er
rv
vi
ic
ce
es
s.
. S
Su
uc
ch
h p
pr
ro
om
mi
is
se
es
s
a
ar
re
e i
in
nt
tr
ri
in
ns
si
ic
ca
al
ll
ly
y d
di
if
ff
fi
ic
cu
ul
lt
t t
to
o h
ho
on
no
or
r.
. T
Th
ho
os
se
e w
wh
ho
o u
us
se
e t
th
he
em
m r
ra
ar
re
el
ly
y h
ha
av
ve
e t
th
he
e t
ti
im
me
e,
, m
mo
ot
ti
iv
va
at
ti
io
on
n o
or
r
r
re
es
so
ou
ur
rc
ce
es
s t
to
o a
as
ss
se
es
ss
s t
th
he
e r
ri
is
sk
ks
s,
, a
an
nd
d a
an
ny
y b
br
re
ea
ac
ch
h w
wo
ou
ul
ld
d h
ha
av
ve
e p
po
ot
te
en
nt
ti
ia
al
ll
ly
y h
hi
ig
gh
hl
ly
y a
ad
dv
ve
er
rs
se
e
c
co
on
ns
se
eq
qu
ue
en
nc
ce
es
s f
fo
or
r t
th
he
e e
ef
ff
fi
ic
ci
ie
en
nt
t c
co
on
nd
du
uc
ct
t o
of
f c
co
om
mm
me
er
rc
ce
e i
in
n t
th
he
e w
wh
ho
ol
le
e e
ec
co
on
no
om
my
y.
. T
Th
he
e m
mo
os
st
t i
in
nt
te
en
ns
se
e
s
sa
af
fe
et
ty
y r
re
eg
gu
ul
la
at
ti
io
on
n s
sh
ho
ou
ul
ld
d t
th
he
er
re
ef
fo
or
re
e a
ap
pp
pl
ly
y t
to
o t
th
he
e p
pr
ro
ov
vi
is
si
io
on
n o
of
f m
me
ea
an
ns
s o
of
f p
pa
ay
ym
me
en
nt
t,
, t
to
o t
th
he
e p
po
oi
in
nt
t o
of
f
s
se
ec
cu
ur
ri
in
ng
g t
th
he
ei
ir
r s
sa
af
fe
et
ty
y a
at
t t
th
he
e h
hi
ig
gh
he
es
st
t p
po
os
ss
si
ib
bl
le
e l
le
ev
ve
el
l,
, s
sh
ho
or
rt
t o
of
f a
an
n o
ou
ut
tr
ri
ig
gh
ht
t g
go
ov
ve
er
rn
nm
me
en
nt
t g
gu
ua
ar
ra
an
nt
te
ee
e.
.
B
Be
ey
yo
on
nd
d t
th
hi
is
s,
, t
th
he
e e
ex
xt
te
en
nt
t o
of
f r
re
eg
gu
ul
la
at
to
or
ry
y a
as
ss
su
ur
ra
an
nc
ce
e i
is
s a
a m
ma
at
tt
te
er
r f
fo
or
r j
ju
ud
dg
gm
me
en
nt
t.
. W
Wh
he
er
re
e s
sy
ys
st
te
em
mi
ic
c r
ri
is
sk
k
a
an
nd
d i
in
nf
fo
or
rm
ma
at
ti
io
on
n a
as
sy
ym
mm
me
et
tr
ry
y a
ar
re
e g
gr
re
ea
at
te
es
st
t,
, r
re
eg
gu
ul
la
at
ti
io
on
n s
sh
ho
ou
ul
ld
d a
at
t l
le
ea
as
st
t s
st
tr
ri
iv
ve
e t
to
o m
mi
in
ni
im
mi
iz
ze
e t
th
he
e r
ri
is
sk
k
o
of
f p
pr
ro
om
mi
is
se
es
s b
be
ei
in
ng
g d
di
is
sh
ho
on
no
or
re
ed
d.
. I
If
f r
re
eg
gu
ul
la
at
ti
io
on
n s
st
to
op
ps
s s
sh
ho
or
rt
t o
of
f p
pr
ro
ov
vi
id
di
in
ng
g a
a g
gu
ua
ar
ra
an
nt
te
ee
e a
ag
ga
ai
in
ns
st
t f
fa
ai
il
lu
ur
re
e,
,
i
it
t m
mu
us
st
t p
pr
ro
ov
vi
id
de
e s
sp
pe
ee
ed
dy
y a
an
nd
d e
ef
ff
fi
ic
ci
ie
en
nt
t m
me
ec
ch
ha
an
ni
is
sm
ms
s f
fo
or
r r
re
es
so
ol
lv
vi
in
ng
g f
fi
in
na
an
nc
ci
ia
al
l d
di
is
st
tr
re
es
ss
s w
wh
he
en
n i
it
t a
ar
ri
is
se
es
s,
,
s
so
o a
as
s t
to
o m
mi
in
ni
im
mi
iz
ze
e t
th
he
e d
da
an
ng
ge
er
r o
of
f l
lo
os
ss
s o
or
r c
co
on
nt
ta
ag
gi
io
on
n.
. A
At
t a
a m
mi
in
ni
im
mu
um
m,
, t
th
hi
is
s r
re
eq
qu
ui
ir
re
es
s t
th
ha
at
t t
th
he
e
r
re
eg
gu
ul
la
at
to
or
r h
ha
av
ve
e u
un
na
am
mb
bi
ig
gu
uo
ou
us
s p
po
ow
we
er
rs
s t
to
o i
in
nt
te
er
rv
ve
en
ne
e i
in
n t
th
he
e o
op
pe
er
ra
at
ti
io
on
ns
s o
of
f i
in
ns
st
ti
it
tu
ut
ti
io
on
ns
s m
ma
ak
ki
in
ng
g s
su
uc
ch
h
i
in
nt
te
en
ns
se
e p
pr
ro
om
mi
is
se
es
s.
.
Financial Institutions and Market (Chapter Three)
24
R
Re
eg
gu
ul
la
at
ti
io
on
n s
sh
ho
ou
ul
ld
d s
se
ee
ek
k t
to
o e
en
ns
su
ur
re
e t
th
ha
at
t,
, w
wh
hi
il
le
e r
ri
is
sk
k r
re
em
ma
ai
in
ns
s,
, t
th
ho
os
se
e m
ma
ak
ki
in
ng
g p
pr
ro
om
mi
is
se
es
s e
en
ns
su
ur
re
e t
th
ha
at
t
r
ri
is
sk
ks
s a
ar
re
e a
ap
pp
pr
ro
op
pr
ri
ia
at
te
el
ly
y m
ma
an
na
ag
ge
ed
d i
in
n a
ac
cc
co
or
rd
da
an
nc
ce
e w
wi
it
th
h t
th
he
e r
re
ea
as
so
on
na
ab
bl
le
e e
ex
xp
pe
ec
ct
ta
at
ti
io
on
ns
s o
of
f t
th
he
ei
ir
r
p
pr
ro
om
mi
is
se
es
s.
.

 R
Re
eg
gu
ul
la
at
ti
io
on
n f
fo
or
r S
So
oc
ci
ia
al
l P
Pu
ur
rp
po
os
se
es
s
A
A f
fu
ur
rt
th
he
er
r c
ca
as
se
e f
fo
or
r r
re
eg
gu
ul
la
at
ti
io
on
n i
is
s s
so
om
me
et
ti
im
me
es
s m
ma
ad
de
e o
on
n t
th
he
e g
gr
ro
ou
un
nd
ds
s t
th
ha
at
t f
fi
in
na
an
nc
ci
ia
al
l i
in
ns
st
ti
it
tu
ut
ti
io
on
ns
s h
ha
av
ve
e
‘
‘c
co
om
mm
mu
un
ni
it
ty
y s
se
er
rv
vi
ic
ce
e o
ob
bl
li
ig
ga
at
ti
io
on
ns
s’
’ t
to
o p
pr
ro
ov
vi
id
de
e s
su
ub
bs
si
id
di
ie
es
s t
to
o s
so
om
me
e c
cu
us
st
to
om
me
er
r g
gr
ro
ou
up
ps
s.
. F
Fo
or
r e
ex
xa
am
mp
pl
le
e,
,
f
fi
in
na
an
nc
ci
ia
al
l i
in
ns
st
ti
it
tu
ut
ti
io
on
ns
s a
ar
re
e u
ur
rg
ge
ed
d t
to
o d
de
el
li
iv
ve
er
r c
ce
er
rt
ta
ai
in
n s
se
er
rv
vi
ic
ce
es
s f
fr
re
ee
e o
of
f c
ch
ha
ar
rg
ge
e o
or
r a
at
t a
a p
pr
ri
ic
ce
e b
be
el
lo
ow
w t
th
he
e
c
co
os
st
t o
of
f p
pr
ro
ov
vi
is
si
io
on
n.
. T
Th
hi
is
s i
is
s t
th
he
e l
le
ea
as
st
t i
in
nf
fl
lu
ue
en
nt
ti
ia
al
l c
ca
as
se
e f
fo
or
r i
in
nt
te
er
rv
ve
en
nt
ti
io
on
n.
.
F
Fi
in
na
an
nc
ci
ia
al
l i
in
ns
st
ti
it
tu
ut
ti
io
on
ns
s,
, l
li
ik
ke
e o
ot
th
he
er
r b
bu
us
si
in
ne
es
ss
s c
co
or
rp
po
or
ra
at
ti
io
on
ns
s,
, a
ar
re
e d
de
es
si
ig
gn
ne
ed
d t
to
o p
pr
ro
od
du
uc
ce
e w
we
ea
al
lt
th
h,
, n
no
ot
t t
to
o
r
re
ed
di
is
st
tr
ri
ib
bu
ut
te
e i
it
t.
. T
Th
hi
is
s i
is
s n
no
ot
t t
to
o s
sa
ay
y t
th
ha
at
t t
th
he
ei
ir
r c
cr
re
ea
at
ti
io
on
n o
of
f w
we
ea
al
lt
th
h s
sh
ho
ou
ul
ld
d i
ig
gn
no
or
re
e t
th
he
e c
cl
la
ai
im
ms
s o
of
f s
so
oc
ci
ia
al
l
a
an
nd
d m
mo
or
ra
al
l p
pr
ro
op
pr
ri
ie
et
ty
y.
. B
Bu
ut
t i
it
t i
is
s a
an
no
ot
th
he
er
r t
th
hi
in
ng
g e
en
nt
ti
ir
re
el
ly
y t
to
o r
re
eq
qu
ui
ir
re
e f
fi
in
na
an
nc
ci
ia
al
l i
in
ns
st
ti
it
tu
ut
ti
io
on
ns
s t
to
o u
un
nd
de
er
rt
ta
ak
ke
e
s
so
oc
ci
ia
al
l r
re
es
sp
po
on
ns
si
ib
bi
il
li
it
ti
ie
es
s f
fo
or
r w
wh
hi
ic
ch
h t
th
he
ey
y a
ar
re
e n
no
ot
t d
de
es
si
ig
gn
ne
ed
d o
or
r w
we
el
ll
l s
su
ui
it
te
ed
d.
. O
Ob
bl
li
ig
gi
in
ng
g f
fi
in
na
an
nc
ci
ia
al
l
i
in
ns
st
ti
it
tu
ut
ti
io
on
ns
s t
to
o s
su
ub
bs
si
id
di
ie
es
s s
so
om
me
e a
ac
ct
ti
iv
vi
it
ti
ie
es
s c
co
om
mp
pr
ro
om
mi
is
se
es
s t
th
he
ei
ir
r e
ef
ff
fi
ic
ci
ie
en
nc
cy
y a
an
nd
d i
is
s u
un
nl
li
ik
ke
el
ly
y t
to
o p
pr
ro
ov
ve
e
s
su
us
st
ta
ai
in
na
ab
bl
le
e i
in
n a
a c
co
om
mp
pe
et
ti
it
ti
iv
ve
e m
ma
ar
rk
ke
et
t.
.
5
5.
.3
3.
. R
Re
eg
gu
ul
la
at
ti
io
on
ns
s o
of
f F
Fi
in
na
an
nc
ci
ia
al
l I
In
ns
st
ti
it
tu
ut
ti
io
on
ns
s
1
1)
) R
Re
eg
gu
ul
la
at
ti
io
on
n o
of
f c
co
om
mm
me
er
rc
ci
ia
al
l b
ba
an
nk
ks
s
D
Du
ue
e t
to
o t
th
he
ei
ir
r i
im
mp
po
or
rt
ta
an
nc
ce
e i
in
n t
th
he
e f
fi
in
na
an
nc
ci
ia
al
l s
sy
ys
st
te
em
m,
, c
co
om
mm
me
er
rc
ci
ia
al
l b
ba
an
nk
ks
s a
ar
re
e t
ty
yp
pi
ic
ca
al
ll
ly
y t
th
he
e m
mo
os
st
t r
re
eg
gu
ul
la
at
te
ed
d
o
of
f a
al
ll
l f
fi
in
na
an
nc
ci
ia
al
l i
in
ns
st
ti
it
tu
ut
ti
io
on
ns
s.
. O
On
ne
e o
of
f t
th
he
e a
ar
re
ea
as
s w
wh
he
er
re
e s
st
ta
at
te
e a
an
nd
d f
fe
ed
de
er
ra
al
l r
re
eg
gu
ul
la
at
to
or
rs
s h
ha
av
ve
e e
ex
xe
er
rc
ci
is
se
ed
d t
th
he
e
m
mo
os
st
t i
in
nf
fl
lu
ue
en
nc
ce
e o
ov
ve
er
r b
ba
an
nk
ki
in
ng
g i
is
s:
:

 C
Co
on
nt
tr
ro
ol
ll
li
in
ng
g w
wh
ha
at
t n
ne
ew
w g
ge
eo
og
gr
ra
ap
ph
hi
ic
c m
ma
ar
rk
ke
et
ts
s b
ba
an
nk
ks
s c
ca
an
n e
en
nt
te
er
r w
wi
it
th
h t
th
he
ei
ir
r o
of
ff
fi
ic
ce
es
s.
.

 T
Th
hr
ro
ou
ug
gh
h t
th
he
e r
re
eg
gu
ul
la
at
ti
io
on
n o
of
f t
th
he
e s
se
er
rv
vi
ic
ce
es
s t
th
ha
at
t b
ba
an
nk
ks
s c
ca
an
n o
of
ff
fe
er
r.
.
U
Un
nf
fo
or
rt
tu
un
na
at
te
el
ly
y,
, r
re
eg
gu
ul
la
at
ti
io
on
ns
s h
ha
av
ve
e b
be
ee
en
n t
ti
ig
gh
ht
t a
an
nd
d s
so
om
me
et
ti
im
me
es
s f
fi
ir
rm
m i
in
n t
th
hi
is
s a
ar
re
ea
a o
ou
ut
t o
of
f c
co
on
nc
ce
er
rn
n f
fo
or
r b
ba
an
nk
k
s
sa
af
fe
et
ty
y (
(a
as
s s
se
er
rv
vi
ic
ce
e i
in
nn
no
ov
va
at
ti
io
on
n c
ca
an
n b
be
e h
hi
ig
gh
hl
ly
y r
ri
is
sk
ky
y)
) a
an
nd
d b
be
ec
ca
au
us
se
e o
of
f a
a d
de
es
si
ir
re
e t
to
o p
pr
ro
ot
te
ec
ct
t c
ce
er
rt
ta
ai
in
n
n
no
on
nb
ba
an
nk
k f
fi
in
na
an
nc
ci
ia
al
l i
in
ns
st
ti
it
tu
ut
ti
io
on
ns
s,
, s
su
uc
ch
h a
as
s c
cr
re
ed
di
it
t u
un
ni
io
on
ns
s,
, s
sa
av
vi
in
ng
gs
s a
an
nd
d l
lo
oa
an
ns
s,
, a
an
nd
d i
in
ns
su
ur
ra
an
nc
ce
e c
co
om
mp
pa
an
ni
ie
es
s,
,
f
fr
ro
om
m h
ha
ar
rd
d b
ba
an
nk
k c
co
om
mp
pe
et
ti
it
ti
io
on
n.
.
F
Fo
or
r e
ex
xa
am
mp
pl
le
e,
, p
pr
ro
ob
ba
ab
bl
ly
y t
th
he
e m
mo
os
st
t i
in
nf
fl
lu
ue
en
nt
ti
ia
al
l l
la
aw
w i
in
n A
Am
me
er
ri
ic
ca
an
n h
hi
is
st
to
or
ry
y i
in
n d
de
ef
fi
in
ni
in
ng
g b
ba
an
nk
k s
se
er
rv
vi
ic
ce
e
p
po
ow
we
er
rs
s w
wa
as
s t
th
he
e G
Gl
la
as
ss
s-
-S
St
te
ea
ag
ga
al
ll
l A
Ac
ct
t (
(o
or
r B
Ba
an
nk
ki
in
ng
g A
Ac
ct
t)
) o
of
f 1
19
93
33
3.
. T
Th
hi
is
s s
sw
we
ee
ep
pi
in
ng
g l
la
aw
w c
co
on
nf
fi
in
ne
ed
d b
ba
an
nk
k
s
se
er
rv
vi
ic
ce
e p
po
ow
we
er
rs
s e
es
ss
se
en
nt
ti
ia
al
ll
ly
y t
to
o t
th
he
e m
ma
ak
ki
in
ng
g o
of
f l
lo
oa
an
ns
s a
an
nd
d t
th
he
e t
ta
ak
ki
in
ng
g o
of
f d
de
ep
po
os
si
it
ts
s,
, w
wh
hi
il
le
e i
in
ns
su
ur
ra
an
nc
ce
e
s
se
er
rv
vi
ic
ce
es
s w
we
er
re
e l
la
ar
rg
ge
el
ly
y r
re
el
le
eg
ga
at
te
ed
d t
to
o i
in
ns
su
ur
ra
an
nc
ce
e c
co
om
mp
pa
an
ni
ie
es
s,
, a
an
nd
d h
ho
om
me
e l
le
en
nd
di
in
ng
g w
wa
as
s c
ce
en
nt
te
er
re
ed
d i
in
n s
sa
av
vi
in
ng
gs
s
a
an
nd
d l
lo
oa
an
n a
as
ss
so
oc
ci
ia
at
ti
io
on
ns
s a
an
nd
d s
sa
av
vi
in
ng
gs
s b
ba
an
nk
ks
s.
. U
U.
.S
S.
. b
ba
an
nk
ke
er
rs
s a
al
ls
so
o l
lo
os
st
t a
an
n i
im
mp
po
or
rt
ta
an
nt
t s
se
er
rv
vi
ic
ce
e p
po
ow
we
er
r t
th
he
ey
y
p
po
os
ss
se
es
ss
se
ed
d i
in
n t
th
he
e d
de
ec
ca
ad
de
es
s b
be
ef
fo
or
re
e G
Gl
la
as
ss
s-
-S
St
te
ea
ag
ga
al
ll
l-
- p
po
ow
we
er
r t
to
o a
as
ss
si
is
st
t t
th
he
ei
ir
r l
la
ar
rg
ge
es
st
t c
co
or
rp
po
or
ra
at
te
e c
cu
us
st
to
om
me
er
rs
s
b
by
y p
pu
ur
rc
ch
ha
as
si
in
ng
g c
co
or
rp
po
or
ra
at
te
e s
st
to
oc
ck
k a
an
nd
d t
th
he
en
n r
re
es
se
el
ll
li
in
ng
g i
it
t i
in
n t
th
he
e o
op
pe
en
n m
ma
ar
rk
ke
et
t.
. F
Fo
or
re
ei
ig
gn
n b
ba
an
nk
ks
s h
ha
av
ve
e
c
co
on
nt
ti
in
nu
ue
ed
d t
to
o o
of
ff
fe
er
r c
co
or
rp
po
or
ra
at
te
e b
bo
on
nd
d a
an
nd
d s
st
to
oc
ck
k u
un
nd
de
er
rw
wr
ri
it
ti
in
ng
g s
se
er
rv
vi
ic
ce
es
s t
to
o A
Am
me
er
ri
ic
ca
an
n c
co
om
mp
pa
an
ni
ie
es
s,
, a
an
nd
d
Financial Institutions and Market (Chapter Three)
25
U
U.
.S
S.
. b
ba
an
nk
ks
s a
ar
re
e a
ac
ct
ti
iv
ve
e i
in
n t
th
he
e s
se
ec
cu
ur
ri
it
ty
y u
un
nd
de
er
rw
wr
ri
it
ti
in
ng
g b
bu
us
si
in
ne
es
ss
s o
ov
ve
er
rs
se
ea
as
s t
th
hr
ro
ou
ug
gh
h a
a v
va
ar
ri
ie
et
ty
y o
of
f a
af
ff
fi
il
li
ia
at
te
ed
d
o
or
rg
ga
an
ni
iz
za
at
ti
io
on
ns
s,
, b
bu
ut
t t
th
he
ey
y h
ha
av
ve
e c
cl
le
ea
ar
rl
ly
y l
lo
os
st
t c
cu
us
st
to
om
me
er
rs
s t
to
o s
se
ec
cu
ur
ri
it
ty
y d
de
ea
al
le
er
rs
s a
an
nd
d f
fo
or
re
ei
ig
gn
n b
ba
an
nk
ks
s
(
(p
pr
ri
in
nc
ci
ip
pa
al
ll
ly
y f
fr
ro
om
m C
Ca
an
na
ad
da
a a
an
nd
d W
We
es
st
te
er
rn
n E
Eu
ur
ro
op
pe
e)
) i
in
n d
do
om
me
es
st
ti
ic
c u
un
nd
de
er
rw
wr
ri
it
ti
in
ng
g,
, e
ex
xc
ce
ep
pt
t f
fo
or
r u
un
nd
de
er
rw
wr
ri
it
ti
in
ng
g
t
th
ho
os
se
e t
ty
yp
pe
es
s o
of
f s
se
ec
cu
ur
ri
it
ti
ie
es
s w
wh
he
er
re
e e
ex
xc
ce
ep
pt
ti
io
on
ns
s h
ha
av
ve
e b
be
ee
en
n g
gr
ra
an
nt
te
ed
d f
fr
ro
om
m f
fe
ed
de
er
ra
al
l r
re
es
st
tr
ri
ic
ct
ti
io
on
ns
s.
. B
Ba
an
nk
ke
er
rs
s
h
ha
av
ve
e a
av
vi
id
dl
ly
y s
so
ou
ug
gh
ht
t s
se
ec
cu
ur
ri
it
ty
y u
un
nd
de
er
rw
wr
ri
it
ti
in
ng
g p
po
ow
we
er
rs
s b
be
ec
ca
au
us
se
e t
th
hi
is
s b
bu
us
si
in
ne
es
ss
s c
ca
an
n b
be
e h
hi
ig
gh
hl
ly
y p
pr
ro
of
fi
it
ta
ab
bl
le
e a
an
nd
d
i
it
t c
co
om
mp
pl
le
em
me
en
nt
ts
s t
tr
ra
ad
di
it
ti
io
on
na
al
l l
le
en
nd
di
in
ng
g s
se
er
rv
vi
ic
ce
es
s.
.
O
On
ne
e o
of
f t
th
he
e m
mo
os
st
t r
ra
ap
pi
id
dl
ly
y e
ex
xp
pa
an
nd
di
in
ng
g a
ar
re
ea
as
s o
of
f b
ba
an
nk
ki
in
ng
g r
re
eg
gu
ul
la
at
ti
io
on
n t
to
od
da
ay
y c
ce
en
nt
te
er
rs
s a
ar
ro
ou
un
nd
d d
di
is
sc
cl
lo
os
su
ur
re
e
r
ru
ul
le
es
s—
— r
re
eg
gu
ul
la
at
ti
io
on
ns
s r
re
eq
qu
ui
ir
ri
in
ng
g f
fi
in
na
an
nc
ci
ia
al
l i
in
ns
st
ti
it
tu
ut
ti
io
on
ns
s t
to
o r
re
ev
ve
ea
al
l c
ce
er
rt
ta
ai
in
n i
in
nf
fn
n t
to
o c
cu
us
st
to
om
me
er
rs
s (
(i
in
n a
an
n e
ef
ff
fo
or
rt
t
t
to
o e
en
nc
co
ou
ur
ra
ag
ge
e s
sh
ho
op
pp
pi
in
ng
g a
ar
ro
ou
un
nd
d a
an
nd
d a
av
vo
oi
id
d d
de
ec
ce
ep
pt
ti
io
on
n)
) a
an
nd
d t
to
o r
re
eg
gu
ul
la
at
to
or
rs
s (
(t
to
o i
im
mp
pr
ro
ov
ve
e s
su
up
pe
er
rv
vi
is
si
io
on
n o
of
f
t
th
he
e b
ba
an
nk
ki
in
ng
g i
in
nd
du
us
st
tr
ry
y)
).
. F
Fo
or
r e
ex
xa
am
mp
pl
le
e,
, b
ba
an
nk
ks
s c
co
ou
ul
ld
d b
be
e r
re
eq
qu
ui
ir
re
ed
d t
to
o d
di
is
sc
cl
lo
os
su
ur
re
e o
of
f a
al
ll
l t
th
he
e i
in
nt
te
er
re
es
st
t a
an
nd
d
f
fe
ee
es
s a
as
ss
so
oc
ci
ia
at
te
ed
d w
wi
it
th
h s
se
el
ll
li
in
ng
g l
lo
oa
an
ns
s a
an
nd
d d
de
ep
po
os
si
it
ts
s t
to
o i
in
nd
di
iv
vi
id
du
ua
al
ls
s w
wh
ho
o a
ar
re
e b
ba
an
nk
k c
cu
us
st
to
om
me
er
rs
s.
. S
Si
im
mi
il
la
ar
rl
ly
y,
, i
in
n
c
ca
as
se
e o
of
f h
ho
om
me
e m
mo
or
rt
tg
ga
ag
ge
e,
, b
ba
an
nk
ks
s c
co
ou
ul
ld
d b
be
e r
re
eq
qu
ui
ir
re
ed
d t
to
o r
re
ep
po
or
rt
t t
to
o t
th
he
e p
pu
ub
bl
li
ic
c a
an
nd
d t
to
o r
re
eg
gu
ul
la
at
to
or
rs
s t
th
he
e
l
lo
oc
ca
at
ti
io
on
ns
s o
of
f b
bo
ot
th
h t
th
he
ei
ir
r a
ap
pp
pr
ro
ov
ve
ed
d a
an
nd
d r
re
ej
je
ec
ct
te
ed
d a
ap
pp
pl
li
ic
ca
at
ti
io
on
ns
s f
fo
or
r l
lo
oa
an
ns
s t
to
o p
pu
ur
rc
ch
ha
as
se
e o
or
r i
im
mp
pr
ro
ov
ve
e h
ho
om
me
es
s
a
as
s a
a c
ch
he
ec
ck
k o
on
n p
po
os
ss
si
ib
bl
le
e d
di
is
sc
cr
ri
im
mi
in
na
at
ti
io
on
n i
in
n l
le
en
nd
di
in
ng
g.
. A
An
no
ot
th
he
er
r c
co
ou
ul
ld
d b
be
e a
a r
re
eq
qu
ui
ir
re
em
me
en
nt
t o
on
n b
ba
an
nk
ks
s a
an
nd
d
o
ot
th
he
er
r d
de
ep
po
os
si
it
to
or
ri
ie
es
s t
to
o n
no
ot
ti
if
fy
y c
cu
us
st
to
om
me
er
rs
s a
an
nd
d r
re
eg
gu
ul
la
at
to
or
rs
s i
in
n a
ad
dv
va
an
nc
ce
e w
wh
he
en
n b
br
ra
an
nc
ch
h o
of
ff
fi
ic
ce
es
s a
ar
re
e t
to
o b
be
e
c
cl
lo
os
se
ed
d.
.
W
Wo
on
nd
de
er
rf
fu
ul
l c
ch
ha
an
ng
ge
es
s i
in
n b
ba
an
nk
ki
in
ng
g r
re
eg
gu
ul
la
at
ti
io
on
n i
in
n r
re
ec
ce
en
nt
t y
ye
ea
ar
rs
s-
- i
in
nc
cl
lu
ud
di
in
ng
g t
th
he
e a
ad
do
op
pt
ti
io
on
n o
of
f n
na
at
ti
io
on
nw
wi
id
de
e
b
ba
an
nk
ki
in
ng
g a
an
nd
d t
th
he
e s
sp
pr
re
ea
ad
di
in
ng
g i
in
nt
te
er
rn
na
at
ti
io
on
na
al
li
iz
za
at
ti
io
on
n o
of
f b
ba
an
nk
k r
re
eg
gu
ul
la
at
ti
io
on
n a
as
s e
ev
vi
id
de
en
nc
ce
ed
d b
by
y t
th
he
e B
Ba
as
se
el
l
A
Ag
gr
re
ee
em
me
en
nt
t o
on
n b
ba
an
nk
k c
ca
ap
pi
it
ta
al
l-
- m
mi
ig
gh
ht
t l
le
ea
ad
d u
us
s t
to
o t
th
hi
in
nk
k t
th
ha
at
t t
th
he
er
re
e i
is
s l
li
it
tt
tl
le
e l
le
ef
ft
t t
to
o d
do
o i
in
n r
re
es
sh
ha
ap
pi
in
ng
g t
th
he
e
f
fu
ut
tu
ur
re
e s
st
tr
ru
uc
ct
tu
ur
re
e o
of
f b
ba
an
nk
k r
re
eg
gu
ul
la
at
ti
io
on
n.
. N
No
ot
th
hi
in
ng
g c
co
ou
ul
ld
d b
be
e f
fu
ur
rt
th
he
er
r f
fr
ro
om
m t
th
he
e t
tr
ru
ut
th
h!
! B
Ba
an
nk
ki
in
ng
g i
in
n t
th
he
e U
Un
ni
it
te
ed
d
S
St
ta
at
te
es
s (
(a
an
nd
d i
in
n m
mo
os
st
t o
ot
th
he
er
r c
co
ou
un
nt
tr
ri
ie
es
s o
of
f t
th
he
e w
wo
or
rl
ld
d)
) r
re
em
ma
ai
in
ns
s h
he
ea
av
vi
il
ly
y b
bu
ur
rd
de
en
ne
ed
d b
by
y c
co
on
ns
st
tr
ra
ai
in
ni
in
ng
g g
go
ov
v’
’t
t
r
ru
ul
le
es
s.
. S
Sl
lo
ow
wl
ly
y a
an
nd
d a
al
lo
on
ng
g a
a z
zi
ig
gz
za
ag
g p
pa
at
th
h,
, b
ba
an
nk
ki
in
ng
g i
is
s e
ex
xp
pe
er
ri
ie
en
nc
ci
in
ng
g a
an
n e
er
ra
a o
of
f d
de
er
re
eg
gu
ul
la
at
ti
io
on
n,
, a
as
s l
le
eg
ga
al
l
c
co
on
ns
st
tr
ra
ai
in
nt
ts
s a
ar
re
e b
be
ei
in
ng
g l
li
if
ft
te
ed
d o
on
n a
a f
fe
ew
w b
ba
an
nk
ki
in
ng
g a
ac
ct
ti
iv
vi
it
ti
ie
es
s.
.
2
2)
) R
Re
eg
gu
ul
la
at
ti
io
on
n o
of
f i
in
ns
su
ur
ra
an
nc
ce
e c
co
om
mp
pa
an
ni
ie
es
s
W
Wh
hi
il
le
e n
no
ot
t q
qu
ui
it
te
e a
as
s h
he
ea
av
vi
il
ly
y r
re
eg
gu
ul
la
at
te
ed
d a
as
s c
co
om
mm
me
er
rc
ci
ia
al
l b
ba
an
nk
ks
s,
, i
in
ns
su
ur
ra
an
nc
ce
e i
in
nt
te
er
rm
me
ed
di
ia
ar
ri
ie
es
s f
fa
ac
ce
e h
ha
ar
rd
d r
ru
ul
le
es
s
t
th
ha
at
t a
ar
re
e i
im
mp
po
os
se
ed
d p
pr
ri
im
ma
ar
ri
il
ly
y b
by
y s
st
ta
at
te
e g
go
ov
v’
’t
ts
s,
, w
wh
hi
ic
ch
h c
cr
re
ea
at
te
e i
in
ns
su
ur
ra
an
nc
ce
e c
co
om
mm
mi
is
ss
si
io
on
ns
s t
to
o r
re
eg
gu
ul
la
at
te
e t
th
he
e
i
in
nd
du
us
st
tr
ry
y.
. F
Fu
un
nd
da
am
me
en
nt
ta
al
l p
pu
ur
rp
po
os
se
e o
of
f i
in
ns
su
ur
ra
an
nc
ce
e c
co
om
mp
pa
an
ny
y r
re
eg
gu
ul
la
at
ti
io
on
n i
is
s t
to
o e
en
ns
su
ur
re
e t
th
ha
at
t t
th
he
e p
pu
ub
bl
li
ic
c i
is
s n
no
ot
t
o
ov
ve
er
rc
ch
ha
ar
rg
ge
ed
d o
or
r p
po
oo
or
rl
ly
y s
se
er
rv
ve
ed
d a
an
nd
d t
to
o g
gu
ua
ar
ra
an
nt
te
ee
e a
ad
de
eq
qu
ua
at
te
e c
co
om
mp
pe
en
ns
sa
at
ti
io
on
n t
to
o i
in
ns
su
ur
ra
an
nc
ce
e c
co
om
mp
pa
an
ni
ie
es
s
t
th
he
em
ms
se
el
lv
ve
es
s.
. A
A n
ne
ew
w c
co
om
mp
pa
an
ny
y m
mu
us
st
t b
be
e c
ch
ha
ar
rt
te
er
re
ed
d u
un
nd
de
er
r t
th
he
e r
ru
ul
le
es
s o
of
f a
a p
pa
ar
rt
ti
ic
cu
ul
la
ar
r h
ho
om
me
e s
st
ta
at
te
e.
. O
On
nc
ce
e
c
ch
ha
ar
rt
te
er
re
ed
d,
, e
ea
ac
ch
h c
co
om
mp
pa
an
ny
y m
mu
us
st
t s
su
ub
bm
mi
it
t p
pe
er
ri
io
od
di
ic
c r
re
ep
po
or
rt
ts
s t
to
o s
st
ta
at
te
e c
co
om
mm
mi
is
ss
si
io
on
ns
s,
, i
it
ts
s a
ag
ge
en
nt
ts
s m
mu
us
st
t b
be
e
l
li
ic
ce
en
ns
se
ed
d b
by
y t
th
he
e s
st
ta
at
te
es
s,
, a
an
nd
d t
th
he
e t
te
er
rm
ms
s o
of
f i
it
ts
s p
po
ol
li
ic
ci
ie
es
s (
(i
in
nc
cl
lu
ud
di
in
ng
g p
pr
re
em
mi
iu
um
m r
ra
at
te
es
s i
it
t c
ch
ha
ar
rg
ge
es
s
p
po
ol
li
ic
cy
yh
ho
ol
ld
de
er
rs
s)
) m
mu
us
st
t b
be
e a
ap
pp
pr
ro
ov
ve
ed
d b
by
y s
st
ta
at
te
e i
in
ns
su
ur
ra
an
nc
ce
e c
co
om
mm
mi
is
ss
si
io
on
ns
s.
. B
Bo
ot
th
h c
co
ou
ur
rt
ts
s a
an
nd
d s
st
ta
at
te
e
c
co
om
mm
mi
is
ss
si
io
on
ns
s i
in
ns
si
is
st
t t
th
ha
at
t a
an
ny
y i
in
nv
ve
es
st
tm
me
en
nt
ts
s o
of
f i
in
nc
co
om
mi
in
ng
g p
po
ol
li
ic
cy
yh
ho
ol
ld
de
er
r p
pr
re
em
mi
iu
um
ms
s m
mu
us
st
t c
co
on
nf
fo
or
rm
m t
to
o t
th
he
e
c
co
om
mm
mo
on
n l
la
aw
w s
st
ta
an
nd
da
ar
rd
d o
of
f a
a ‘
‘p
pr
ru
ud
de
en
nt
t p
pe
er
rs
so
on
n.
.”
”
Financial Institutions and Market (Chapter Three)
26
3
3)
) R
Re
eg
gu
ul
la
at
ti
io
on
n o
of
f p
pe
en
ns
si
io
on
n f
fu
un
nd
ds
s
B
B/
/s
se
e p
pe
en
ns
si
io
on
n f
fu
un
nd
ds
s h
ha
av
ve
e r
ri
is
se
en
n r
ra
ap
pi
id
dl
ly
y t
to
o h
ho
ol
ld
d t
th
he
e b
bu
ul
lk
k o
of
f t
th
he
e r
re
et
ti
ir
re
em
me
en
nt
t s
sa
av
vi
in
ng
gs
s o
of
f m
mi
il
ll
li
io
on
ns
s o
of
f
w
wo
or
rk
ke
er
rs
s;
; t
th
he
ey
y h
ha
av
ve
e b
be
ee
en
n s
su
ub
bj
je
ec
ct
t t
to
o m
mu
uc
ch
h h
he
ea
av
vi
ie
er
r r
re
eg
gu
ul
la
at
ti
io
on
n b
by
y t
th
he
e c
co
ou
ur
rt
ts
s a
an
nd
d g
go
ov
v’
’t
t a
ag
ge
en
nc
ci
ie
es
s.
. B
B/
/s
se
e
e
em
mp
pl
lo
oy
ye
er
rs
s-
-t
th
he
e p
pr
ri
in
nc
ci
ip
pa
al
l c
cr
re
ea
at
to
or
rs
s a
an
nd
d m
ma
an
na
ag
ge
er
rs
s o
of
f p
pe
en
ns
si
io
on
n p
pl
la
an
ns
s-
- h
ha
av
ve
e a
an
n i
in
nc
ce
en
nt
ti
iv
ve
e t
to
o t
ta
ak
ke
e o
on
n
c
co
on
ns
si
id
de
er
ra
ab
bl
le
e r
ri
is
sk
k i
in
n a
an
n e
ef
ff
fo
or
rt
t t
to
o m
mi
in
ni
im
mi
iz
ze
e t
th
he
e c
co
os
st
t b
bu
ur
rd
de
en
n t
th
he
ey
y m
mu
us
st
t c
ca
ar
rr
ry
y,
, m
ma
an
ny
y p
pe
en
ns
si
io
on
n p
pl
la
an
ns
s
e
ev
ve
en
n t
to
od
da
ay
y r
re
em
ma
ai
in
n o
on
nl
ly
y p
pa
ar
rt
ti
ia
al
ll
ly
y f
fu
un
nd
de
ed
d-
- t
th
ha
at
t i
is
s,
, t
th
he
e m
ma
ar
rk
ke
et
t v
va
al
lu
ue
e o
of
f t
th
he
ei
ir
r a
as
ss
se
et
ts
s p
pl
lu
us
s e
ex
xp
pe
ec
ct
te
ed
d
i
in
nv
v’
’t
t i
in
nc
co
om
me
e d
do
oe
es
s n
no
ot
t f
fu
ul
ll
ly
y c
co
ov
ve
er
r a
al
ll
l t
th
he
e b
be
en
ne
ef
fi
it
ts
s p
pr
ro
om
mi
is
se
ed
d t
to
o p
pe
en
ns
si
io
on
n p
pl
la
an
n m
me
em
mb
be
er
rs
s.
. W
Wh
hi
il
le
e
E
En
ng
gl
li
is
sh
h c
co
om
mm
mo
on
n l
la
aw
w r
re
eq
qu
ui
ir
re
es
s p
pe
en
ns
si
io
on
n p
pl
la
an
ns
s t
to
o b
be
e “
“p
pr
ru
ud
de
en
nt
t”
” m
ma
an
na
ag
ge
er
rs
s o
of
f t
th
he
ei
ir
r m
me
em
mb
be
er
rs
s’
’
r
re
et
ti
ir
re
em
me
en
nt
t s
sa
av
vi
in
ng
gs
s,
, m
ma
an
ny
y p
pe
en
ns
si
io
on
ns
s h
ha
av
ve
e b
br
ra
an
nc
ch
he
ed
d o
ou
ut
t i
in
nt
to
o r
ri
is
sk
ki
ie
er
r i
in
nv
ve
es
st
tm
me
en
nt
ts
s,
, i
in
nc
cl
lu
ud
di
in
ng
g r
re
ea
al
l e
es
st
ta
at
te
e
d
de
ev
v’
’t
t p
pr
ro
oj
je
ec
ct
ts
s a
an
nd
d d
de
er
ri
iv
va
at
ti
iv
ve
e s
se
ec
cu
ur
ri
it
ti
ie
es
s c
co
on
nt
tr
ra
ac
ct
ts
s.
.
4
4)
) R
Re
eg
gu
ul
la
at
ti
io
on
n o
of
f f
fi
in
na
an
nc
ce
e c
co
om
mp
pa
an
ni
ie
es
s
F
Fi
in
na
an
nc
ce
e c
co
om
mp
pa
an
ni
ie
es
s a
ar
re
e a
am
mo
on
ng
g t
th
he
e m
mo
os
st
t i
im
mp
po
or
rt
ta
an
nt
t l
le
en
nd
de
er
rs
s a
an
nd
d b
bu
us
si
in
ne
es
ss
se
es
s i
in
n r
re
ec
ce
en
nt
t y
ye
ea
ar
rs
s.
. T
Th
he
e b
bu
ul
lk
k
o
of
f r
re
eg
gu
ul
la
at
ti
io
on
n o
of
f t
th
hi
is
s i
in
nd
du
us
st
tr
ry
y i
is
s a
at
t t
th
he
e s
st
ta
at
te
e l
le
ev
ve
el
l a
an
nd
d f
fo
oc
cu
us
se
es
s p
pr
ri
in
nc
ci
ip
pa
al
ll
ly
y o
on
n t
th
he
e m
ma
ak
ki
in
ng
g o
of
f
c
co
on
ns
su
um
me
er
r l
lo
oa
an
ns
s.
. S
Se
ev
ve
er
ra
al
l s
st
ta
at
te
es
s i
im
mp
po
os
se
e m
ma
ax
xi
im
mu
um
m l
lo
oa
an
n r
ra
at
te
es
s s
so
o t
th
ha
at
t f
fi
in
na
an
nc
ce
e c
co
om
mp
pa
an
ni
ie
es
s a
ar
re
e l
li
im
mi
it
te
ed
d
i
in
n t
th
he
e a
am
mo
ou
un
nt
t o
of
f i
in
nt
te
er
re
es
st
t t
th
he
ey
y c
ca
an
n c
ch
ha
ar
rg
ge
e c
co
on
ns
su
um
me
er
rs
s,
, w
wh
hi
ic
ch
h t
te
en
nd
ds
s t
to
o l
li
im
mi
it
t t
th
he
e v
vo
ol
lu
um
me
e o
of
f c
cr
re
ed
di
it
t
e
ex
xt
te
en
nd
de
ed
d t
to
o r
ri
is
sk
ki
ie
er
r h
ho
ou
us
se
eh
ho
ol
ld
ds
s.
. T
Th
he
e s
st
ta
at
te
es
s,
, t
tr
ry
yi
in
ng
g t
to
o p
pr
ro
ot
te
ec
ct
t c
co
on
ns
su
um
me
er
rs
s,
, a
al
ls
so
o u
us
su
ua
al
ll
ly
y s
sp
pe
el
ll
l o
ou
ut
t t
th
he
e
r
ru
ul
le
es
s f
fo
or
r i
in
ns
st
ta
al
ll
lm
me
en
nt
t l
lo
oa
an
n c
co
on
nt
tr
ra
ac
ct
ts
s a
an
nd
d t
th
he
e c
co
on
nd
di
it
ti
io
on
ns
s u
un
nd
de
er
r w
wh
hi
ic
ch
h a
au
ut
to
om
mo
ob
bi
il
le
es
s,
, f
fu
ur
rn
ni
it
tu
ur
re
e,
, h
ho
om
me
e
a
ap
pp
pl
li
ia
an
nc
ce
es
s,
, o
or
r o
ot
th
he
er
r h
ho
ou
us
se
eh
ho
ol
ld
d a
as
ss
se
et
ts
s c
ca
an
n b
be
e r
re
ep
po
os
ss
se
es
ss
se
ed
d f
fo
or
r n
no
on
np
pa
ay
ym
me
en
nt
t o
of
f a
a l
lo
oa
an
n e
ex
xt
te
en
nd
de
ed
d b
by
y a
a
f
fi
in
na
an
nc
ce
e c
co
om
mp
pa
an
ny
y.
. c
co
om
mp
pe
et
te
en
nt
t
Financial Institution and Capital Market - Chapter 3-6.pdf
Financial Institution and Capital Market - Chapter 3-6.pdf
Financial Institution and Capital Market - Chapter 3-6.pdf
Financial Institution and Capital Market - Chapter 3-6.pdf
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  • 1. Financial Institutions and Market (Chapter Three) 1 Chapter Three Interest rates in the Financial System 3.1. Introduction For financing and investing decision making in a dynamic financial environment of market participants, it is crucial to understand interest rates as one of the key aspects of the financial environment. Several economic theories explain determinants of the level of interest rates. Another group of theories explain the variety of interest rates and their term structure, i.e. relationship between interest rates and the maturity of debt instruments. 3.2. Interest rate determination 3.2.1. The rate of interest Interest rate is a rate of return paid by a borrower of funds to a lender of them, or a price paid by a borrower for a service, the right to make use of funds for a specified period. Thus it is one form of yield on financial instruments. Two questions are being raised by market participants:  What determines the average rate of interest in an economy?  Why do interest rates differ on different types and lengths of loans and debt instruments? Interest rates vary depending on borrowing or lending decision. There is interest rate at which banks are lending (the offer rate) and interest rate they are paying for deposits (the bid rate). The difference between them is called a spread. Such a spread also exists between selling and buying rates in local and international money and capital markets. The spread between offer and bid rates provides a cover for administrative costs of the financial intermediaries and includes their profit. The spread is influenced by the degree of competition among financial institutions. In the short-term international money markets the spread is lower if there is considerable competition. Conversely, the spread between banks borrowing and lending rates to their retail customers is larger in general due to considerably larger degree of loan default risk.  Interest rate structure Interest rate structure is the relationships between the various rates of interest in an economy on financial instruments of different lengths (terms) or of different degrees of risk. Interest rates can be classified in to two: 1. Nominal interest rate and 2. Real interest rate The rates of interest quoted by financial institutions are nominal rates, and are used to
  • 2. Financial Institutions and Market (Chapter Three) 2 calculate interest payments to borrowers and lenders. However, the loan repayments remain the same in money terms and make up a smaller and smaller proportion of the borrower’s income. The real cost of the interest payments declines over time. Therefore there is a real interest rate, i.e. the rate of interest adjusted to take into account the rate of inflation. Since the real rate of return to the lender can be also falling over time, the lender determines interest rates to take into account the expected rate of inflation over the period of a loan. When there is uncertainty about the real rate of return to be received by the lender, he will be inclined to lend at fixed interest rates for short-term. The loan can be ‘rolled over’ at a newly set rate of interest to reflect changes in the expected rate of inflation. On the other hand, lenders can set a floating interest rate, which is adjusted to the inflation rate changes. Real interest rate is the difference between the nominal rate of interest and the expected rate of inflation. It is a measure of the anticipated opportunity cost of borrowing in terms of goods and services forgone. The dependence between the real and nominal interest rates is expressed using the following equation: i =(1+ r)(1+ ie) - 1 Where i is the nominal rate of interest, r is the real rate of interest and ie e is the expected rate of inflation. Example Assume that a bank is providing a company with loan of 1000 thou. Euro for one year at a real rate of interest of 3 per cent . At the end of the year it expects to receive back 1030 thous. Euro of purchasing power at current prices. However, if the bank expects a 10 per cent rate of inflation over the next year, it will want 1133 thous. Euro back (10 per cent above 1030 thous). The interest rate required by the bank would be 13.3 per cent i = (1+ 0, 03) (1 + 0, 1) - 1 = (1, 03)(1,1) - 1 = 1,133 - 1=0,133 or 13,3 per cent When simplified, the equation becomes: i = r + ie In the example, this would give 3 percent plus 10 per cent = 13 per cent. The real rate of return is thus: r = i - ie When assumption is made that r is stable over time, the equation provides the Fisher effect. It suggests that changes in short-term interest rates occur because of changes in the expected rate of inflation. If a further assumption is made that expectations about the rate of inflation of market participants are correct, then the key reason for changes in interest rates is the changes in the current rate of inflation. Borrowers and lenders think mostly in terms of real interest rates. There are two economic
  • 3. Financial Institutions and Market (Chapter Three) 3 theories explaining the level of real interest rates in an economy:  The loan able funds theory  Liquidity preference theory 3.1.2. Interest rate theories: 1) Loan able funds theory The term ‘loan able funds’ simply refers to the sums of money offered for lending and demanded by consumers and investors during a given period of time. The interest rate in the model is determined by the interaction between potential borrowers and potential savers. Loan able funds are funds borrowed and lent in an economy during a specified period of time – the flow of money from surplus to deficit units in the economy. The loan able funds theory was formulated by the Swedish economist Knut Wicksell in the 1900s. According to him, the level of interest rates is determined by the supply and demand of loan able funds available in an economy’s credit market (i.e., the sector of the capital markets for long-term debt instruments). This theory suggests that investment and savings in the economy determine the level of long-term interest rates. Short-term interest rates, however, are determined by an economy’s financial and monetary conditions. According to the loanable funds theory for the economy as a whole: Demand for loan able funds = net investment + net additions to liquid reserves Supply of loan able funds = net savings + increase in the money supply Given the importance of loan able funds and that the major suppliers of loanable funds are commercial banks, the key role of this financial intermediary in the determination of interest rates is vivid. The central bank is implementing specific monetary policy; therefore it influences the supply of loan able funds from commercial banks and thereby changes the level of interest rates. As central bank increases (decreases) the supply of credit available from commercial banks, it decreases (increases) the level of interest rate II) Liquidity preference theory Liquidity preference i s preference for holding financial wealth in the form of short- term, liquid assets rather than long-term illiquid assets, based principally on the fear that long-term assets will lose capital value over time. Saving and investment of market participants under economic uncertainty may be much more influenced by expectations and by exogenous shocks than by underlying real forces. A possible response of risk-averse savers is to vary the form in which they hold their financial wealth depending on their expectations about asset prices. Since they are
  • 4. Financial Institutions and Market (Chapter Three) 4 concerned about the risk of loss in the value of assets, they are likely to vary the average liquidity of their portfolios. A liquid asset is the one that can be turned into money quickly, cheaply and for a known monetary value. Liquidity preference theory is another one aimed at explaining interest rates. J. M. Keynes has proposed (back in 1936) a simple model, which explains how interest rates are determined based on the preferences of households to hold money balances rather than spending or investing those funds. Money balances can be held in the form of currency or checking accounts, however it does earn a very low interest rate or no interest at all. A key element in the theory is the motivation for individuals to hold money balance despite the loss of interest income. Money is the most liquid of all financial assets and, of course, can easily be utilized to consume or to invest. The quantity of money held by individuals depends on their level of income and, consequently, for an economy the demand for money is directly related to an economy’s income. There is a trade-off between holding money balance for purposes of maintaining liquidity and investing or lending funds in less liquid debt instruments in order to earn a competitive market interest rate. The difference in the interest rate that can be earned by investing in interest-bearing debt instruments and money balances represents an opportunity cost for maintaining liquidity. The lower the opportunity cost, the greater the demand for money balances; the higher the opportunity cost, the lower the demand for money balance. According to the liquidity preference theory, the level of interest rates is determined by the supply and demand for money balances. The money supply is controlled by the policy tools available to the country’s Central Bank. Conversely, in the loan funds theory the level of interest rates is determined by supply and demand, however it is in the credit market. 3.2. The structure of interest rates The variety of interest rates that exist in the economy and the structure of interest rates is subject to considerable change due to different factors. Such changes are important to the operation of monetary policy. Interest rates vary because of differences in the time period, the degree of risk, and the transactions costs associated with different financial instruments. The greater the risk of default associated with an asset, the higher must be the interest rate paid upon it as compensation for the risk. This explains why some
  • 5. Financial Institutions and Market (Chapter Three) 5 borrowers pay higher rates of interest than others. 3.3. Term structure of interest rates The relationship between the yields on comparable securities but different maturities is called the term structure of interest rates. The primary focus here is the Treasury market. The graphic that depicts the relationship between the yields on Treasury securities with different maturities is known as the yield curve and, therefore, the maturity spread is also referred to as the yield curve spread. Yield curve: Shows the relationships between the interest rates payable on bonds with different lengths of time to maturity. That is, it shows the term structure of interest rates. The focus on the Treasury yield curve functions is due mainly because of its role as a benchmark for setting yields in many other sectors of the debt market. However, a Treasury yield curve based on observed yields on the Treasury market is an unsatisfactory measure of the relation between required yield and maturity. The key reason is that securities with the same maturity may actually provide different yields. Hence, it is necessary to develop more accurate and reliable estimates of the Treasury yield curve. It is important to estimate the theoretical interest rate that the Treasury would have to pay assuming that the security it issued is a zero-coupon security. If the term structure is plotted at a given point in time, based on the yield to maturity, or the spot rate, at successive maturities against maturity, one of the three shapes of the yield curve would be observed. The type of yield curve, when the yield increases with maturity, is referred to as an upward-sloping yield curve or a positively sloped yield curve. A distinction is made for upward sloping yield curves based on the steepness of the yield curve. The steepness of the yield curve is typically measured in terms of the maturity spread between the long-term and short-term yields. A downward-sloping or inverted yield curve is the one, where yields in general decline as maturity increases. A variant of the flat yield is the one in which the yield on short-term and long-term Treasuries are similar but the yield on intermediate-term Treasuries are much lower than, for example, the six-month and 30-year yields. Such a yield curve is referred to as a humped yield curve. The three observed curve for the shape of yield curve is depicted as follows:-
  • 6. Financial Institutions and Market (Chapter Three) 6
  • 7. Financial Institutions and Market (Chapter Three) 7
  • 8. Financial Institutions and Market (Chapter Three) 8 Chapter Four 4. Financial Markets in the Financial System 4.1. Introduction Investors exchange financial instruments in a financial market. The more popular term used for the exchanging of financial instruments is that they are “traded.” Financial markets provide the following three major economic functions: (1) price discovery, (2) liquidity, and (3) reduced transaction costs. Despite the important role of financial markets, their role in allowing the efficient allocation for those who have funds to invest and those who need funds may not always work as described earlier. As a result, financial systems have found the need for a special type of financial entity, a financial intermediary, when there are conditions that make it difficult for lenders or investors of funds to deal directly with borrowers of funds in financial markets. Financial markets can be classified depending on different factors and discussed in this chapter. 4.2. Money Markets 4.2.1. Money market purpose and structure The purpose of money markets is facilitate the transfer of short-term funds from agents with excess funds (corporations, financial institutions, individuals, government) to those market participants who lack funds for short-term needs. They play central role in the country’s financial system, by influencing it through the country’s monetary authority. For financial institutions and to some extent to other non-financial company’s money markets allow for executing such functions as:  Fund raising;  Cash management;  Risk management;  Speculation or position financing;  Signaling;  Providing access to information on prices. The money-market instruments are often grouped in the following way:  Treasury bills and other short-term government securities (up to one year);  inter bank loans, deposits and other bank liabilities;  Repurchase agreements and similar collateralized short-term loans;  Commercial papers, issued by non-deposit entities (non-finance companies, finance companies, local government, etc. ;  Certificates of deposit;
  • 9. Financial Institutions and Market (Chapter Three) 9 All these instruments have slightly different characteristics, fulfilling the demand of investors and borrowers for diversification in terms of risk, rate of return, maturity and liquidity, and also diversification in terms of sources of financing and means of payment. Many investors regard individual money market instruments as close substitutes, thus changes in all money market interest rates are highly correlated. Major characteristics of money market instruments are:  Short-term nature;  Low risk;  High liquidity (in general);  Close to money. Money markets consist of tradable instruments as well as non-tradable instruments. In terms of risk two specific money-market segments are:  unsecured debt instruments markets (e.g. deposits with various maturities, ranging from overnight to one year);  secured debt instruments markets (e.g. REPOs) with maturities also ranging from overnight to one year. Differences in amount of risk are characteristic to the secured and the unsecured segments of the money markets. Credit risk is minimized by limiting access to high-quality counter-parties. When providing unsecured interbank deposits, a bank transfers funds to another bank for a specified period of time during which it assumes full counterparty credit risk. In the secured REPO markets, this counterparty credit risk is mitigated as the bank that provides liquidity receives collateral (e.g., bonds) in return. 3.1.3. Money market participants Money market participants include mainly credit institutions and other financial intermediaries, governments, as well as individuals (households). Ultimate lenders in the money markets are households and companies with a financial surplus which they want to lend, while ultimate borrowers are companies and government with a financial deficit which need to borrow. Ultimate lenders and borrowers usually do not participate directly in the markets. As a rule they deal through an intermediary, who performs functions of broker, dealer or investment banker. Important role is played by government, which issue money market securities and use the proceeds to finance state budget deficits. The government debt is often refinanced by issuing new securities to pay off old debt, which matures. Thus it manages to finance long-
  • 10. Financial Institutions and Market (Chapter Three) 10 term needs through money market securities with short-term maturities. 3.2. Money market instruments 1. Treasury bills (popularly referred to as T-bills) are short-term securities issued by the U.S. government; they have original maturities of four weeks, three months, or six months. T-bills carry no stated interest rate. Instead, the government sells these securities on a discounted basis. This means that the holder of a T-bill realizes a return by buying these securities for less than the maturity value and then receiving the maturity value at maturity. 2. Commercial paper is a promissory note—a written promise to pay—issued by a large, creditworthy corporation or a municipality. This financial instrument has an original maturity that typically ranges from one day to 270 days. The issuers of most commercial paper back up the paper with bank lines of credit, which means that a bank is standing by ready to pay the obligation if the issuer is unable to. Commercial paper may be either interest bearing or sold on a discounted basis. 3. Certificates of deposit (CDs) are written promises by a bank to pay a depositor. Investors can buy and sell negotiable certificates of deposit, which are CDs issued by large commercial banks. Negotiable CDs typically have original maturities between one month and one year and have denominations of $100,000 or more. Investors pay face value for negotiable CDs, and receive a fixed rate of interest on the CD. On the maturity date, the issuer repays the principal, plus interest. 4. Another form of short-term borrowing is the repurchase agreement. To understand a repurchase agreement, we will briefly describe why companies use this instrument. There are participants in the financial system that use leverage in implementing trading strategies in the bond market. That is, the strategy involves buying bonds with borrowed funds. Rather than borrowing from a bank, a market participant can use the bonds it has acquired as collateral for a loan. Specifically, the lender will loan a certain amount of funds to an entity in need of funds using the bonds as collateral. We refer to this common lending agreement as a repurchase agreement or repo because it specifies that the borrower sells the bonds to the lender in exchange for proceeds and at some specified future date the borrower repurchases the bonds from the lender at a specified price. The specified price, called the repurchase price, is higher than the price at which the bonds are sold because it embodies the interest cost that the lender is charging the borrower.
  • 11. Financial Institutions and Market (Chapter Three) 11 The interest rate in a repo is the repo rate. Thus, a repo is nothing more than a collateralized loan; that is, a loan backed by a specific asset. We classify it as a money market instrument because the term of a repo is typically less than one year. 5. Bankers’ acceptances are short-term loans, usually to importers and exporters, made by banks to finance specific transactions. An acceptance is created when a draft (a promise to pay) is written by a bank’s customer and the bank “accepts” it, promising to pay. The bank’s acceptance of the draft is a promise to pay the face amount of the draft to whoever presents it for payment. The bank’s customer then uses the draft to finance a transaction, giving this draft to the supplier in exchange for goods. Because acceptances arise from specific transactions, they are available in a wide variety of principal amounts. Typically, bankers’ acceptances have maturities of less than 180 days. Bankers’ acceptances are sold at a discount from their face value, and the face value is paid at maturity. The likelihood of default on bankers’ acceptances is very small because acceptances are backed by both the issuing bank and the purchaser of goods. 4.3. The Capital Market The capital market is the sector of the financial market where long-term financial instruments issued by corporations and governments trade. Here “long-term” refers to a financial instrument with an original maturity greater than one year and perpetual securities (those with no maturity). There are two types of capital market securities: those that represent shares of ownership interest, also called equity, issued by corporations, and those that represent indebtedness, issued by corporations and by the U.S., state, and local governments. Earlier we described the distinction between equity and debt instruments. Equity includes common stock and preferred stock. Because common stock represents ownership of the corporation, and because the corporation has a perpetual life, common stock is a perpetual security; it has no maturity. Preferred stock also represents ownership interest in a corporation and can either have a redemption date or be perpetual. A capital market debt obligation is a financial instrument whereby the borrower promises to repay the maturity value at a specified period of time beyond one year. We can break down these debt obligations into two categories: bank loans and debt securities. While at one time, bank loans were not considered capital market instruments, today there is a market for the trading of these debt obligations. One form of such a bank loan is a syndicated bank loan. This is a loan in which a group (or syndicate) of banks provides funds to the borrower. The need for a group of banks arises because the
  • 12. Financial Institutions and Market (Chapter Three) 12 exposure in terms of the credit risk and the amount sought by a borrower may be too large for any one bank. Debt securities include (1) bonds, (2) notes, (3) medium-term notes, and (4) asset-backed securities. The distinction between a bond and a note has to do with the number of years until the obligation matures when the issuer originally issued the security. Historically, a note is a debt security with a maturity at issuance of 10 years or less; a bond is a debt security with a maturity greater than 10 years. The distinction between a note and a medium-term note has nothing to do with the maturity, but rather the method of issuing the security. 4.4. The Primary Market When an issuer first issues a financial instrument, it is sold in the primary market. Companies sell new issues and thus raise new capital in this market. Therefore, it is the market whose sales generate proceeds for the issuer of the financial instrument. Issuance of securities must comply with the U.S. securities laws. The primary market consists of both a public market and a Private placement market. The public market offering of new issues typically involves the use of an investment bank. The process of investment banks bringing these securities to the public markets is underwriting. Another method of offering new issues is through an auction process. Bonds by certain entities such as municipal governments and some regulated entities are issued in this way. There are different regulatory requirements for securities issued to the general investing public and those privately placed. The two major securities laws in the United States—the Securities Act of 1933 and the Securities Exchange Act of 1934—require that unless otherwise exempted, all securities offered to the general public must register with the SEC. One of the exemptions set forth in the 1933 Act is for “transactions by an issuer not involving any public offering.” We refer to such offerings as private placement offerings. Prior to 1990, buyers of privately placed securities were not permitted to sell these securities for two years after acquisition. SEC Rule 144A, approved by the SEC in 1990, eliminates the two-year Holding period if certain conditions are met As a result; the private placement market is now classified into two categories: Rule 144A offerings and non-Rule 144A (commonly referred to as traditional private placements). 4.5. The Secondary Market A secondary market is one in which financial instruments are resold among investors. Issuers do not raise new capital in the secondary market and, therefore, the issuer of the security does
  • 13. Financial Institutions and Market (Chapter Three) 13 not receive proceeds from the sale. Trading takes place among investors. Investors who buy and sell securities on the secondary markets may obtain the services of stockbrokers, entities who buy or sell securities for their clients. We categorize secondary markets based on the way in which they trade, referred to as market structure. There are two overall market structures for trading financial instruments: order driven and quote driven. Market structure is the mechanism by which buyers and sellers interact to determine price and quantity. In an order-driven market structure, buyers and sellers submit their bids through their broker, who relays these bids to a centralized location for bid- matching, and transaction execution. We also refer to an order-driven market as an auction market. In a quote-driven market structure, intermediaries (market makers or dealers) quote the prices at which the public participants trade. Market makers provide a bid quote (to buy) and an offer quote (to sell), and realize revenues from the spread between these two quotes. Thus, market makers Derive a profit from the spread and the turnover of their inventory of a security. There are hybrid market structures that have elements of both a quote-driven and order-driven market structure. We can also classify secondary markets in terms of organized exchanges and over-the- counter markets. Exchanges are central trading locations where financial instruments trade. The financial instruments must be those listed by the organized exchange. By listed, we mean the financial Instrument has been accepted for trading on the exchange. To be listed, the issuer must satisfy requirements set forth by the exchange. In the case of common stock, the major organized exchange is the New York Stock Exchange (NYSE). For the common stock of a corporation to list on the NYSE, for example, it must meet minimum requirements for pretax earnings, net tangible assets, market capitalization, and number and distribution of shares publicly held. In the United States, the SEC must approve the market to qualify it as an exchange. In contrast, an over-the-counter market (OTC market) is generally where unlisted financial instruments trade. For common stock, there are Listed and unlisted stocks. Although there are listed bonds, bonds are typically unlisted and therefore trade over-the-counter. The same is true of loans. The foreign exchange market is an OTC market. There are listed and unlisted derivative instruments. 4.6. Debt Markets
  • 14. Financial Institutions and Market (Chapter Three) 14 Debt markets are used by both firms and governments to raise funds for long-term purposes, though most investment by firms is financed by retained profits. Bonds are long-term borrowing instruments for the issuer. Major issuers of bonds are governments (Treasury bonds in US, gilts in the UK, Bunds in Germany) and firms, which issue corporate bonds Corporate as well as government bonds vary very considerably in terms of their risk. Some corporate bonds are secured against assets of the company that issued them, whereas other bonds are unsecured. Bonds secured on the assets of the issuing company are known as debentures. Bonds that are not secured are referred to as loan stock. Banks are major issuers of loan stock. The fact that unsecured bonds do not provide their holders with a claim on the assets of the issuing firm in the event of default is normally compensated for by means of a higher rate of coupon payment. Important characteristics of bonds involve: The conventional or straight bond has the following characteristics: Residual maturity (or redemption date). As time passes, the residual maturity of any bond shortens. Bonds are classified into ‘short-term’ (with lives up to five years); ‘medium-term’ (from five to fifteen years) ; ‘long-term’(over fifteen years). Bonds pay a fixed rate of interest, called coupon. It is normally made in two installments, at six-monthly intervals, each equal to half the rate specified in the Bond’s coupon. The coupon divided by the par value of the bond (100 Euro) gives the coupon rate on the bond. The par or redemption value of bonds is commonly 100 Euro (or other currency). This is also the price at which bonds are first issued. However, since the preparations for issue take time, market conditions may change in such a way as to make the bonds unattractive at their existing coupon at the time they are offered for sale. They will then have to be sold at a discount to 100 Euro, in order to make the coupon rate approximate the market rate of interest. If, vise versa, the market interest rates fall, the coupon may make the bond attractive at a price above 100 Euro. In these cases the issuers are making a last- minute adjustment to the price which they hope will make the bonds acceptable to the market. Bond prices fluctuate inversely with market interest rates. If market rates rise, people prefer to hold the new, higher-yielding issues than existing bonds. Existing bonds will be sold and their price will fall. Eventually, existing bonds with various coupons will be willingly held, but only when their price has fallen to the point where the coupon expressed as a percentage of the current price approximates the new market rate.
  • 15. Financial Institutions and Market (Chapter Three) 15 4.7. Equity Markets Equity market is one of the key sectors of financial markets where long-term financial instruments are traded. The purpose of equity instruments issued by corporations is to raise funds for the firms. The provider of the funds is granted a residual claim on the company’s income, and becomes one of the owners of the firm. For market participants equity securities mean holding wealth as well as a source of new finance, and are of great significance for savings and investment process in a market economy. The purpose of equity is the following:  A new issue of equity shares is an important source of external corporate financing;  Equity shares perform a financing role from internally generated funds (retained earnings);  Equity shares perform an institutional role as a means of ownership. Within the savings-investment process magnitude of retained earnings exceeds that of the new stock issues and constitutes the main source of funds for the firms. Equity instruments can be traded publicly and privately. External financing through equity instruments is determined by the following financial factors:  The degree of availability of internal financing within total financing needs of the firm;  The cost of available alternative financing sources;  Current market price of the firm’s equity shares, which determines the return of equity investments. Internal equity financing of companies is provided through retained earnings. When internally generated financing is scarce due to low levels of profitability and retained earnings, and also due to low depreciation, but the need for long-term investments is high, companies turn to look for external financing sources. Firms may raise funds by issuing equity that grants the investor a residual claim on the company’s income. Low interest rates provide incentives for use of debt instruments, thus lowering demand for new equity issues. High equity issuance costs force companies to look for other sources of financing as well. However, during the period of stock market growth high market prices of equity shares encourage companies to issue new equity, providing with the possibility to attract larger magnitude of funds from the market players. Equity instruments
  • 16. Financial Institutions and Market (Chapter Three) 16 1. Common shares Common (ordinary) shares represent partial ownership of the company and provide their holders claims to future streams of income, paid out of company profits and commonly referred to as dividends. Common shareholders are residual claimants, i.e. they are entitled to a share only in those profits which remain after bondholders and preference shareholders have been paid. If the company is liquidated, shareholders have a claim on any remaining assets only after prior claimants have been paid. Therefore common shareholders face larger risks than other stakeholders of the company (e.g. bondholders and owners of preferred shares. On the other hand, if the value of the company increases, the shareholders are entitled to larger potential benefits, which may well exceed the guaranteed interest of bondholders. Common or ordinary share (stock) – an equity share that does not have a fixed dividend yield. 2. Preferred shares Preferred shares is a financial instrument, which represents an equity interest in a firm and which usually does not allow for voting rights of its owners. Typically the investor into it is only entitled to receive a fixed contractual amount of dividends and this make this instrument similar to debt. However, it is similar to an equity instrument because the payment is only made after payments to the investors in the firm’s debt instruments are satisfied. Therefore it is call a hybrid instrument. Technically preferred shareholders share ownership of the firm with common shareholders and are compensated when company generates earnings. Therefore, if the company does not earn sufficient net profit, from which to pay the preferred share dividends it may not pay dividends without the risk of bankruptcy. Because preferred stockholders typically are entitled to a fixed contractual amount, preferred stock is referred to as a fixed income instrument. Preferred share – an equity security, which carries a predetermined constant dividend payment. 4.8. Derivative Market We classify financial markets in terms of cash markets and derivative markets. The cash market, also referred to as the spot market, is the market for the immediate purchase and sale of a financial instrument. In contrast, some financial instruments are contracts that specify that the contract holder has either the obligation or the choice to buy or sell something at or by some future date. The “something” that is the subject of the contract is the underlying asset or simply the underlying. The underlying can be a stock, a bond, a financial index, an interest rate, a currency, or a commodity. Such contracts derive their value from the value of
  • 17. Financial Institutions and Market (Chapter Three) 17 the underlying; hence, we refer to these contracts as derivative instruments, or simply derivatives, and the market in which they trade is the derivatives market. Derivatives instruments, or simply derivatives, include futures, forwards, options, swaps, caps, and floors. We postpone a discussion of these important financial instruments, as well as their applications in corporate finance and portfolio management, to later chapters. The primary role of derivative instruments is to provide a transitionally efficient vehicle for protecting against various types of risk encountered by investors and issuers. Admittedly, it is difficult to see at this early stage how derivatives are useful for controlling risk in an efficient way since too often the popular press focuses on how derivatives have been misused by corporate treasurers and portfolio managers.
  • 18. Financial Institutions and Market (Chapter Three) 18 C CH HA AP PT TE ER R F FI IV VE E R RE EG GU UA AL LT TI IO ON N O OF F F FI IN NA AN NC CI IA AL L M MA AR RK KE ET TS S A AN ND D I IN NS ST TI IT TU UT TI IO ON NS S 5 5. .1 1. . P Pu ur rp po os se e o of f R Re eg gu ul la at ti io on n F Fi in na an nc ci ia al l i in ns st ti it tu ut ti io on ns s a ar re e t th he e m mo os st t h he ea av vi il ly y r re eg gu ul la at te ed d o of f a al ll l b bu us si in ne es ss se es s i in n t th he e w wo or rl ld d. . A Ar ro ou un nd d t th he e g gl lo ob be e t th he es se e f fi in na an nc ci ia al l s se er rv vi ic ce e f fi ir rm ms s f fa ac ce e s st tr ri in ng ge en nt t g go ov ve er rn nm me en nt t r ru ul le es s l li im mi it ti in ng g t th he e s se er rv vi ic ce es s t th he ey y c ca an n o of ff fe er r, , t te er rr ri it to or ri ie es s/ /l la an nd d t th he ey y c ca an n e en nt te er r, , t th he e m ma ak ke eu up p o of f t th he ei ir r p po or rt tf fo ol li io os s o of f a as ss se et ts s, , l li ia ab bi il li it ti ie es s, , a an nd d c ca ap pi it ta al l, , a an nd d e ev ve en n h ho ow w t th he ey y p pr ri ic ce e a an nd d d de el li iv ve er r t th he ei ir r s se er rv vi ic ce es s t to o t th he e p pu ub bl li ic c. . O Ov ve er r t th he e c ce en nt tu ur ri ie es s a a v va ar ri ie et ty y o of f r re ea as so on ns s h ha av ve e b be ee en n o of ff fe er re ed d f fo or r h he ea av vy y g go ov ve er rn nm me en nt t i in nt te er rr ru up pt ti io on n i in nt to o t th he e f fi in na an nc ci ia al l i in ns st ti it tu ut ti io on ns s’ ’ s se ec ct to or r, , i in nc cl lu ud di in ng g p pr ro ot te ec ct ti in ng g t th he e p pu ub bl li ic c’ ’s s s sa av vi in ng gs s a an nd d e en ns su ur ri in ng g t th ha at t c co on ns su um me er rs s r re ec ce ei iv ve e a an n a ad de eq qu ua at te e q qu ua an nt ti it ty y a an nd d q qu ua al li it ty y o of f f fi in na an nc ci ia al l s se er rv vi ic ce es s t th ha at t a ar re e r re ea as so on na ab bl ly y p pr ri ic ce ed d. . M Ma an ny y e ec co on no om mi is st ts s, , f fi in na an nc ci ia al l a an na al ly ys st ts s, , a an nd d f fi in na an nc ci ia al l i in ns st ti it tu ut ti io on ns s h ha av ve e a ar rg gu ue ed d o ov ve er r t th he e y ye ea ar rs s t th ha at t g go ov ve er rn nm me en nt t r re eg gu ul la at ti io on n h ha as s d do on ne e m mo or re e h ha ar rm m t th ha an n g go oo od d f fo or r b bo ot th h f fi in na an nc ci ia al l i in ns st ti it tu ut ti io on ns s t th he em ms se el lv ve es s a an nd d f fo or r t th he e p pu ub bl li ic c t th he ey y s se er rv ve e. . I In n p pa ar rt ti ic cu ul la ar r, , g go ov ve er rn nm me en nt t r re es st tr ri ic ct ti io on ns s a al ll le eg ge ed dl ly y h ha av ve e a al ll lo ow we ed d n no on n r re eg gu ul la at te ed d o or r l le es ss s r re eg gu ul la at te ed d f fi in na an nc ci ia al l s se er rv vi ic ce e f fi ir rm ms s t to o a at tt ta ac ck k t th he e m ma ar rk ke et ts s a an nd d c ca ap pt tu ur re e m ma an ny y o of f l le es ss s r re eg gu ul la at te ed d f fi in na an nc ci ia al l s se er rv vi ic ce es s, , w wh ho o a ar re e n no ot t s su uf ff fi ic ci ie en nt tl ly y f fr re ee e t to o c co om mp pe et te e e ef ff fe ec ct ti iv ve el ly y. . M Mo or re eo ov ve er r, , r re eg gu ul la at ti io on ns s a ar re e o of ft te en n b ba ac ck kw wa ar rd d l lo oo ok ki in ng g, , a ad dd dr re es ss si in ng g p pr ro ob bl le em ms s w wh hi ic ch h h ha av ve e l lo on ng g s si in nc ce e d di is sa ap pp pe ea ar re ed d, , a an nd d t th he ey y m ma ay y c co om mp po ou un nd d t th hi is s p pr ro ob bl le em m o of f “ “r re el le ev va an nc cy y” ” b by y c ch ha an ng gi in ng g m mu uc ch h m mo or re e s sl lo ow wl ly y t th ha an n t th he e f fr re ee e m ma ar rk ke et tp pl la ac ce e, , i in nh hi ib bi it ti in ng g t th he e a ab bi il li it ty y o of f t th he e r re eg gu ul la at te ed d f fi in na an nc ci ia al l i in ns st ti it tu ut ti io on ns s t to o s st ta ay y a ab br re ea as st t o of f n ne ew w t te ec ch hn no ol lo og gi ie es s a an nd d c ch ha an ng gi in ng g c cu us st to om me er r t ta as st te es s. . 5 5. .2 2. . P Pr ri in nc ci ip pl le es s o of f R Re eg gu ul la at ti io on n R Re eg gu ul la at ti io on n, , h ho ow we ev ve er r, , h ha as s g gr re ea at t p po ot te en nt ti ia al l t to o i im mp po os se e c co os st ts s a an nd d s sh ho ou ul ld d b be e d de es si ig gn ne ed d t to o m me ee et t i it ts s p pu ur rp po os se es s w wh hi il le e m mi in ni im mi iz zi in ng g d di ir re ec ct t c co os st ts s o of f r re eg gu ul la at ti io on n a an nd d t th he e b br ro oa ad de er r c co os st ts s a ar ri is si in ng g f fr ro om m r ru ul le es s w wh hi ic ch h r re es st tr ri ic ct t e ec co on no om mi ic c a ac ct ti iv vi it ty y. . T Th hu us s, , r re eg gu ul la at ti io on n r re eq qu ui ir re es s t th ha at t a a c ca ar re ef fu ul l b ba al la an nc ce e b be e s st tr ru uc ck k b b/ /n n e ef ff fe ec ct ti iv ve en ne es ss s & & e ef ff fi ic ci ie en nc cy y   C Co om mp pe et ti it ti iv ve e N Ne eu ut tr ra al li it ty y C Co om mp pe et ti it ti iv ve e n ne eu ut tr ra al li it ty y r re eq qu ui ir re es s t th ha at t t th he e r re eg gu ul la at to or ry y b bu ur rd de en n a ap pp pl ly yi in ng g t to o a a p pa ar rt ti ic cu ul la ar r f fi in na an nc ci ia al l c co om mm mi it tm me en nt t o or r p pr ro om mi is se e a ap pp pl ly y t to o a al ll l w wh ho o m ma ak ke e s su uc ch h c co om mm mi it tm me en nt ts s. . I It t r re eq qu ui ir re es s f fu ur rt th he er r t th ha at t t th he er re e b be e: : › › M Mi in ni im ma al l b ba ar rr ri ie er rs s t to o e en nt tr ry y a an nd d e ex xi it t f fr ro om m m ma ar rk ke et ts s a an nd d p pr ro od du uc ct ts s; ; › › N No o u un nd du ue e r re es st tr ri ic ct ti io on ns s o on n i in ns st ti it tu ut ti io on ns s o or r t th he e p pr ro od du uc ct ts s t th he ey y o of ff fe er r; ; a an nd d › › M Ma ar rk ke et ts s o op pe en n t to o t th he e w wi id de es st t p po os ss si ib bl le e r ra an ng ge e o of f p pa ar rt ti ic ci ip pa an nt ts s. .   C Co os st t E Ef ff fe ec ct ti iv ve en ne es ss s
  • 19. Financial Institutions and Market (Chapter Three) 19 C Co os st t e ef ff fe ec ct ti iv ve en ne es ss s i is s o on ne e o of f t th he e m mo os st t d di if ff fi ic cu ul lt t i is ss su ue es s f fo or r r re eg gu ul la at to or ry y c cu ul lt tu ur re es s t to o c co om me e t to o t te er rm ms s w wi it th h. . A An ny y f fo or rm m o of f r re eg gu ul la at ti io on n i in nv vo ol lv ve es s a a n na at tu ur ra al l t te en ns si io on n b be et tw we ee en n e ef ff fe ec ct ti iv ve en ne es ss s a an nd d e ef ff fi ic ci ie en nc cy y. . R Re eg gu ul la at ti io on n c ca an n b be e m ma ad de e t to ot ta al ll ly y e ef ff fe ec ct ti iv ve e b by y s si im mp pl ly y p pr ro oh hi ib bi it ti in ng g a al ll l a ac ct ti io on ns s p po ot te en nt ti ia al ll ly y i in nc co om mp pa at ti ib bl le e w wi it th h t th he e r re eg gu ul la at to or ry y o ob bj je ec ct ti iv ve e. . B Bu ut t, , b by y i in nh hi ib bi it ti in ng g p pr ro od du uc ct ti iv ve e a ac ct ti iv vi it ti ie es s a al lo on ng g w wi it th h t th he e a an nt ti i- -s so oc ci ia al l, , s su uc ch h a an n a ap pp pr ro oa ac ch h i is s l li ik ke el ly y t to o b be e h hi ig gh hl ly y i in ne ef ff fi ic ci ie en nt t. . T Th he e u un nd de er rl ly yi in ng g l le eg gi is sl la at ti iv ve e f fr ra am me ew wo or rk k m mu us st t b be e e ef ff fe ec ct ti iv ve e, , i in nc cl lu ud di in ng g b by y f fo os st te er ri in ng g c co om mp pl li ia an nc ce e t th hr ro ou ug gh h e en nf fo or rc ce em me en nt t i in n c ca as se es s w wh he er re e p pa ar rt ti ic ci ip pa an nt ts s d do o n no ot t a ab bi id de e b by y t th he e r ru ul le es s. . H Ho ow we ev ve er r, , a a c co os st t- -e ef ff fe ec ct ti iv ve e r re eg gu ul la at to or ry y s sy ys st te em m a al ls so o r re eq qu ui ir re es s: : › › A A p pr re es su um mp pt ti io on n i in n f fa av vo or r o of f m mi in ni im ma al l r re eg gu ul la at ti io on n u un nl le es ss s a a h hi ig gh he er r l le ev ve el l o of f i in nt te er rv ve en nt ti io on n i is s j ju us st ti if fi ie ed d; ; › › A Al ll lo oc ca at ti io on n o of f f fu un nc ct ti io on ns s a am mo on ng g r re eg gu ul la at to or ry y b bo od di ie es s w wh hi ic ch h m mi in ni im mi iz ze es s o ov ve er rl la ap ps s, , d du up pl li ic ca at ti io on n & & c co on nf fl li ic ct ts s; ; › › A An n e ex xp pl li ic ci it t m ma an nd da at te e f fo or r r re eg gu ul la at to or ry y b bo od di ie es s t to o b ba al la an nc ce e e ef ff fi ic ci ie en nc cy y a an nd d e ef ff fe ec ct ti iv ve en ne es ss s; ; a an nd d › › T Th he e a al ll lo oc ca at ti io on n o of f r re eg gu ul la at to or ry y c co os st ts s t to o t th ho os se e e en nj jo oy yi in ng g t th he e b be en ne ef fi it ts s. .   T Tr ra an ns sp pa ar re en nc cy y I If f t th he er re e i is s a a g ge en ne er ra al l p pe er rc ce ep pt ti io on n t th ha at t a a p pa ar rt ti ic cu ul la ar r g gr ro ou up p o of f f fi in na an nc ci ia al l i in ns st ti it tu ut ti io on ns s c ca an nn no ot t f fa ai il l b be ec ca au us se e t th he ey y h ha av ve e t th he e i im mp pr ri im ma at tu ur r o of f g go ov ve er rn nm me en nt t, , t th he er re e i is s a a g gr re ea at t d da an ng ge er r t th ha at t p pe er rc ce ep pt ti io on n w wi il ll l b be ec co om me e r re ea al li it ty y. . T Tr ra an ns sp pa ar re en nc cy y o of f r re eg gu ul la at ti io on n r re eq qu ui ir re es s t th ha at t a al ll l g gu ua ar ra an nt te ee es s b be e m ma ad de e e ex xp pl li ic ci it t a an nd d t th ha at t a al ll l p pu ur rc ch ha as se er rs s a an nd d p pr ro ov vi id de er rs s o of f f fi in na an nc ci ia al l p pr ro od du uc ct ts s b be e f fu ul ll ly y a aw wa ar re e o of f t th he ei ir r r ri ig gh ht ts s a an nd d r re es sp po on ns si ib bi il li it ti ie es s. . I It t s sh ho ou ul ld d b be e a a t to op p p pr ri io or ri it ty y o of f a an n e ef ff fe ec ct ti iv ve e f fi in na an nc ci ia al l r re eg gu ul la at to or ry y s st tr ru uc ct tu ur re e t th ha at t f fi in na an nc ci ia al l p pr ro om mi is se es s ( (b bo ot th h p pu ub bl li ic c a an nd d p pr ri iv va at te e) ) b be e u un nd de er rs st to oo od d. .   F Fl le ex xi ib bi il li it ty y T Th he e r re eg gu ul la at to or ry y f fr ra am me ew wo or rk k m mu us st t h ha av ve e t th he e f fl le ex xi ib bi il li it ty y t to o c co op pe e w wi it th h c ch ha an ng gi in ng g i in ns st ti it tu ut ti io on na al l a an nd d p pr ro od du uc ct t s st tr ru uc ct tu ur re es s w wi it th ho ou ut t l lo os si in ng g i it ts s e ef ff fe ec ct ti iv ve en ne es ss s. .   A Ac cc co ou un nt ta ab bi il li it ty y R Re eg gu ul la at to or ry y a ag ge en nc ci ie es s s sh ho ou ul ld d o op pe er ra at te e i in nd de ep pe en nd de en nt tl ly y o of f s se ec ct ti io on na al l i in nt te er re es st ts s a an nd d w wi it th h a ap pp pr ro op pr ri ia at te el ly y s sk ki il ll le ed d s st ta af ff f. . I In n a ad dd di it ti io on n, , t th he e r re eg gu ul la at to or ry y s st tr ru uc ct tu ur re e m mu us st t b be e a ac cc co ou un nt ta ab bl le e t to o i it ts s s st ta ak ke eh ho ol ld de er rs s a an nd d s su ub bj je ec ct t t to o r re eg gu ul la ar r r re ev vi ie ew ws s o of f i it ts s e ef ff fi ic ci ie en nc cy y a an nd d e ef ff fe ec ct ti iv ve en ne es ss s. . 5 5. .2 2. . F Fo or rm ms s o of f F Fi in na an nc ci ia al l R Re eg gu ul la at ti io on n M Mo os st t g go ov ve er rn nm me en nt ts s t th hr ro ou ug gh ho ou ut t t th he e w wo or rl ld d r re eg gu ul la at te e v va ar ri io ou us s a as sp pe ec ct ts s o of f f fi in na an nc ci ia al l a ac ct ti iv vi it ti ie es s b be ec ca au us se e t th he ey y r re ec co og gn ni iz ze e t th he e v vi it ta al l r ro ol le e p pl la ay ye ed d b by y a a c co ou un nt tr ry y’ ’s s f fi in na an nc ci ia al l s sy ys st te em m. . A Al lt th ho ou ug gh h t th he e d de eg gr re ee e o of f r re eg gu ul la at ti io on n v va ar ri ie es s f fr ro om m c co ou un nt tr ry y t to o c co ou un nt tr ry y, , r re eg gu ul la at ti io on n t ta ak ke es s o on ne e o of f t th he e f fo ol ll lo ow wi in ng g f fo ou ur r f fo or rm ms s: :
  • 20. Financial Institutions and Market (Chapter Three) 20 1 1. . D Di is sc cl lo os su ur re e r re eg gu ul la at ti io on n r re eq qu ui ir re es s t th ha at t a an ny y p pu ub bl li ic cl ly y t tr ra ad de ed d c co om mp pa an ny y p pr ro ov vi id de e f fi in na an nc ci ia al l i in nf fo or rm ma at ti io on n a an nd d n no on nf fi in na an nc ci ia al l i in nf fo or rm ma at ti io on n o on n a a t ti im me el ly y b ba as si is s t th ha at t w wo ou ul ld d b be e e ex xp pe ec ct te ed d t to o a af ff fe ec ct t t th he e v va al lu ue e o of f i it ts s s se ec cu ur ri it ty y t to o a ac ct tu ua al l a an nd d p po ot te en nt ti ia al l i in nv ve es st to or rs s. . G Go ov ve er rn nm me en nt ts s j ju us st ti if fy y d di is sc cl lo os su ur re e r re eg gu ul la at ti io on n b by y p po oi in nt ti in ng g o ou ut t t th ha at t t th he e i is ss su ue er r h ha as s a ac cc ce es ss s t to o b be et tt te er r i in nf fo or rm ma at ti io on n a ab bo ou ut t t th he e e ec co on no om mi ic c w we el ll l- -b be ei in ng g o of f t th he e e en nt ti it ty y t th ha an n t th ho os se e w wh ho o o ow wn n o or r a ar re e c co on nt te em mp pl la at ti in ng g o ow wn ne er rs sh hi ip p o of f t th he e s se ec cu ur ri it ti ie es s. . E Ec co on no om mi is st ts s r re ef fe er r t to o t th hi is s u un ne ev ve en n a ac cc ce es ss s o or r u un ne ev ve en n p po os ss se es ss si io on n o of f i in nf fo or rm ma at ti io on n a as s a as sy ym mm me et tr ri ic c i in nf fo or rm ma at ti io on n. . I In n t th he e U Un ni it te ed d S St ta at te es s, , d di is sc cl lo os su ur re e r re eg gu ul la at ti io on n i is s e em mb be ed dd de ed d i in n v va ar ri io ou us s s se ec cu ur ri it ti ie es s a ac ct ts s t th ha at t d de el le eg ga at te e t to o t th he e S Se ec cu ur ri it ti ie es s a an nd d E Ex xc ch ha an ng ge e C Co om mm mi is ss si io on n ( (S SE EC C) ) t th he e r re es sp po on ns si ib bi il li it ty y f fo or r g ga at th he er ri in ng g a an nd d p pu ub bl li ic ci iz zi in ng g r re el le ev va an nt t i in nf fo or rm ma at ti io on n, , a an nd d f fo or r p pu un ni is sh hi in ng g t th ho os se e i is ss su ue er rs s w wh ho o s su up pp pl ly y f fr ra au ud du ul le en nt t o or r m mi is sl le ea ad di in ng g d da at ta a. . H Ho ow we ev ve er r, , d di is sc cl lo os su ur re e r re eg gu ul la at ti io on n d do oe es s n no ot t a at tt te em mp pt t t to o p pr re ev ve en nt t t th he e i is ss su ua an nc ce e o of f r ri is sk ky y a as ss se et ts s. . R Ra at th he er r, , t th he e S SE EC C’ ’s s s so ol le e m mo ot ti iv va at ti io on n i is s t to o a as ss su ur re e t th ha at t i is ss su ue er rs s s su up pp pl ly y d di il li ig ge en nt t a an nd d i in nt te el ll li ig ge en nt t i in nv ve es st to or rs s w wi it th h t th he e i in nf fo or rm ma at ti io on n n ne ee ed de ed d f fo or r a a f fa ai ir r e ev va al lu ua at ti io on n o of f t th he e s se ec cu ur ri it ti ie es s. . 2 2. . F Fi in na an nc ci ia al l a ac ct ti iv vi it ty y r re eg gu ul la at ti io on n r ru ul le es s a ab bo ou ut t t tr ra ad de er rs s o of f s se ec cu ur ri it ti ie es s a an nd d t tr ra ad di in ng g o on n f fi in na an nc ci ia al l m ma ar rk ke et ts s c co om mp pr ri is se e. . P Pr ro ob ba ab bl ly y t th he e b be es st t e ex xa am mp pl le e o of f t th hi is s t ty yp pe e o of f r re eg gu ul la at ti io on n i is s t th he e s se et t o of f r ru ul le es s p pr ro oh hi ib bi it ti in ng g t th he e t tr ra ad di in ng g o of f a a s se ec cu ur ri it ty y b by y t th ho os se e w wh ho o, , b be ec ca au us se e o of f t th he ei ir r p pr ri iv vi il le eg ge ed d p po os si it ti io on n i in n a a c co or rp po or ra at ti io on n, , k kn no ow w m mo or re e a ab bo ou ut t t th he e i is ss su ue er r’ ’s s e ec co on no om mi ic c p pr ro os sp pe ec ct ts s t th ha an n t th he e g ge en ne er ra al l i in nv ve es st ti in ng g p pu ub bl li ic c. . S Su uc ch h i in nd di iv vi id du ua al ls s a ar re e i in ns si id de er rs s a an nd d i in nc cl lu ud de e, , y ye et t a ar re e n no ot t l li im mi it te ed d t to o, , c co or rp po or ra at te e m ma an na ag ge er rs s a an nd d m me em mb be er rs s o of f t th he e b bo oa ar rd d o of f d di ir re ec ct to or rs s. . T Th ho ou ug gh h i it t i is s n no ot t i il ll le eg ga al l f fo or r i in ns si id de er rs s t to o b bu uy y o or r s se el ll l t th he e s st to oc ck k o of f a a c co om mp pa an ny y i in n w wh hi ic ch h t th he ey y a ar re e c co on ns si id de er re ed d a an n i in ns si id de er r, , i il ll le eg ga al l i in ns si id de er r t tr ra ad di in ng g i is s t th he e t tr ra ad di in ng g i in n a a s se ec cu ur ri it ty y o of f a a c co om mp pa an ny y b by y a a p pe er rs so on n w wh ho o i is s a an n i in ns si id de er r, , a an nd d t th he e t tr ra ad de e i is s b ba as se ed d o on n m ma at te er ri ia al l, , n no on np pu ub bl li ic c i in nf fo or rm ma at ti io on n. . I Il ll le eg ga al l i in ns si id de er r t tr ra ad di in ng g i is s a an no ot th he er r p pr ro ob bl le em m p po os se ed d b by y a as sy ym mm me et tr ri ic c i in nf fo or rm ma at ti io on n. . T Th he e S SE EC C i is s r re es sp po on ns si ib bl le e f fo or r m mo on ni it to or ri in ng g t th he e t tr ra ad de es s t th ha at t c co or rp po or ra at te e o of ff fi ic ce er rs s, , d di ir re ec ct to or rs s, , a as s w we el ll l a as s m ma aj jo or r s st to oc ck kh ho ol ld de er rs s, , e ex xe ec cu ut te e i in n t th he e s se ec cu ur ri it ti ie es s o of f t th he ei ir r f fi ir rm ms s. . A An no ot th he er r e ex xa am mp pl le e o of f f fi in na an nc ci ia al l a ac ct ti iv vi it ty y r re eg gu ul la at ti io on n i is s t th he e s se et t o of f r ru ul le es s i im mp po os se ed d b by y t th he e S SE EC C r re eg ga ar rd di in ng g t th he e s st tr ru uc ct tu ur re e a an nd d o op pe er ra at ti io on ns s o of f e ex xc ch ha an ng ge es s w wh he er re e s se ec cu ur ri it ti ie es s t tr ra ad de e. . T Th he e j ju us st ti if fi ic ca at ti io on n f fo or r s su uc ch h r ru ul le es s i is s t th ha at t i it t r re ed du uc ce es s t th he e l li ik ke el li ih ho oo od d t th ha at t m me em mb be er rs s o of f e ex xc ch ha an ng ge es s m ma ay y b be e a ab bl le e, , u un nd de er r c ce er rt ta ai in n c ci ir rc cu um ms st ta an nc ce es s, , t to o c co ol ll lu ud de e a an nd d d de ef fr ra au ud d t th he e g ge en ne er ra al l i in nv ve es st ti in ng g p pu ub bl li ic c. . B Bo ot th h t th he e S SE EC C a an nd d t th he e s se el lf f- -r re eg gu ul la at to or ry y o or rg ga an ni iz za at ti io on n, , t th he e F Fi in na an nc ci ia al l I In nd du us st tr ry y R Re eg gu ul la at to or ry y A Au ut th ho or ri it ty y ( (F FI IN NR RA A) ), , a ar re e r re es sp po on ns si ib bl le e f fo or r t th he e r re eg gu ul la at ti io on n o of f m ma ar rk ke et ts s a an nd d s se ec cu ur ri it ti ie es s f fi ir rm ms s i in n t th he e U Un ni it te ed d S St ta at te es s. . T Th he e S SE EC C a an nd d t th he e C Co om mm mo od di it ty y F Fu ut tu ur re es s T Tr ra ad di in ng g C Co om mm mi is ss si io on n ( (C CF FT TC C) ), , a an no ot th he er r f fe ed de er ra al l g go ov ve er rn nm me en nt t e en nt ti it ty y, , s sh ha ar re e r re es sp po on ns si ib bi il li it ty y f fo or r t th he e f fe ed de er ra al l r re eg gu ul la at ti io on n o of f t tr ra ad di in ng g i in n o op pt ti io on ns s, , f fu ut tu ur re es s a an nd d o ot th he er r d de er ri iv va at ti iv ve e i in ns st tr ru um me en nt ts s. . D De er ri iv va at ti iv ve e i in ns st tr ru um me en nt ts s a ar re e s se ec cu ur ri it ti ie es s w wh ho os se e v va al lu ue e d de ep pe en nd ds s o on n a a s sp pe ec ci if fi ie ed d o ot th he er r s se ec cu ur ri it ty y o or r a as ss se et t. . F Fo or r e ex xa am mp pl le e, , a a c ca al ll l o op pt ti io on n o on n a a s st to oc ck k i is s a a d de er ri iv va at ti iv ve e s se ec cu ur ri it ty y w wh ho os se e v va al lu ue e d de ep pe en nd ds s o on n t th he e v va al lu ue e o of f t th he e u un nd de er rl ly yi in ng g s st to oc ck k; ; i if f t th he e v va al lu ue e o of f t th he e s st to oc ck k i in nc cr re ea as se es s, , t th he e v va al lu ue e o of f t th he e c ca al ll l o op pt ti io on n o on n t th he e s st to oc ck k i in nc cr re ea as se es s a as s w we el ll l. .
  • 21. Financial Institutions and Market (Chapter Three) 21 3 3. . R Re eg gu ul la at ti io on n o of f f fi in na an nc ci ia al l i in ns st ti it tu ut ti io on ns s i is s a a f fo or rm m o of f g go ov ve er rn nm me en nt ta al l m mo on ni it to or ri in ng g t th ha at t r re es st tr ri ic ct ts s t th he ei ir r a ac ct ti iv vi it ti ie es s. . S Su uc ch h r re eg gu ul la at ti io on n i is s j ju us st ti if fi ie ed d b by y g go ov ve er rn nm me en nt ts s b be ec ca au us se e o of f t th he e v vi it ta al l r ro ol le e p pl la ay ye ed d b by y f fi in na an nc ci ia al l i in ns st ti it tu ut ti io on ns s i in n a a c co ou un nt tr ry y’ ’s s e ec co on no om my y. . 4 4. . G Go ov ve er rn nm me en nt t r re eg gu ul la at ti io on n o of f f fo or re ei ig gn n p pa ar rt ti ic ci ip pa an nt ts s i in nv vo ol lv ve es s t th he e i im mp po os si it ti io on n o of f r re es st tr ri ic ct ti io on ns s o on n t th he e r ro ol le es s t th ha at t f fo or re ei ig gn n f fi ir rm ms s c ca an n p pl la ay y i in n a a c co ou un nt tr ry y’ ’s s i in nt te er rn na al l m ma ar rk ke et t a an nd d t th he e o ow wn ne er rs sh hi ip p o or r c co on nt tr ro ol l o of f f fi in na an nc ci ia al l i in ns st ti it tu ut ti io on ns s. . A Al lt th ho ou ug gh h m ma an ny y c co ou un nt tr ri ie es s h ha av ve e t th hi is s f fo or rm m o of f r re eg gu ul la at ti io on n, , t th he er re e h ha as s b be ee en n a a t tr re en nd d t to o l le es ss se en n t th he es se e r re es st tr ri ic ct ti io on ns s. . T Th he e c cu ur rr re en nt t U U. .S S. . r re eg gu ul la at to or ry y s sy ys st te em m i in nv vo ol lv ve es s a an n a ar rr ra ay y o of f i in nd du us st tr ry y a an nd d m ma ar rk ke et t- -f fo oc cu us se ed d r re eg gu ul la at to or rs s. . T Th ho ou ug gh h t th he e s sp pe ec ci if fi ic cs s o of f f fi in na an nc ci ia al l r re eg gu ul la at to or ry y r re ef fo or rm m a ar re e n no ot t d de et te er rm mi in ne ed d a at t t th he e t ti im me e o of f t th hi is s w wr ri it ti in ng g, , t th he er re e a ar re e s se ev ve er ra al l e el le em me en nt ts s o of f r re ef fo or rm m t th ha at t a ap pp pe ea ar r i in n t th he e m ma aj jo or r p pr ro op po os sa al ls s: : A An n a ad dv va an nc ce ed d- -w wa ar rn ni in ng g s sy ys st te em m, , w wh hi ic ch h w wo ou ul ld d a at tt te em mp pt t t to o i id de en nt ti if fy y s sy ys st te em mi ic c r ri is sk ks s b be ef fo or re e t th he ey y a af ff fe ec ct t t th he e g ge en ne er ra al l e ec co on no om my y. . › › I In nc cr re ea as se ed d t tr ra an ns sp pa ar re en nc cy y i in n c co on ns su um me er r f fi in na an nc ce e, , m mo or rt tg ga ag ge e b br ro ok ke er ra ag ge e, , a an nd d a as ss se et t b ba ac ck ke ed d s se ec cu ur ri it ti ie es s, , a an nd d c co om mp pl le ex x s se ec cu ur ri it ti ie es s. . › › I In nc cr re ea as se ed d t tr ra an ns sp pa ar re en nc cy y o of f c cr re ed di it t- -r ra at ti in ng g f fi ir rm ms s: : E En nh ha an nc ce ed d c co on ns su um me er r p pr ro ot te ec ct ti io on ns s. . › › I In nc cr re ea as se ed d r re eg gu ul la at ti io on n o of f n no on nb ba an nk k l le en nd de er rs s. . S So om me e m me ea as su ur re e t to o a ad dd dr re es ss s t th he e i is ss su ue e o of f f fi in na an nc ci ia al l i in ns st ti it tu ut ti io on ns s t th ha at t m ma ay y b be e s so o l la ar rg ge e t th ha at t t th he ei ir r f fi in na an nc ci ia al l d di is st tr re es ss s a af ff fe ec ct ts s t th he e r re es st t o of f t th he e e ec co on no om my y. . 5 5. .3 3. . A Ar rg gu um me en nt ts s f fo or r a an nd d a ag ga ai in ns st t F Fi in na an nc ci ia al l S Sy ys st te em m R Re eg gu ul la at ti io on n T Th he er re e a ar re e d d/ /t t v vi ie ew ws s a as s t to o t th he e n ne ee ed d a an nd d e ex xt te en nt t o of f g go ov v’ ’t t i in nt te er rv ve en nt ti io on n i in n f fi in na an nc ci ia al l m ma ar rk ke et ts s. . S So om me e a ar rg gu ue e t th ha at t f fr re ee e a an nd d c co om mp pe et ti it ti iv ve e m ma ar rk ke et ts s c ca an n p pr ro od du uc ce e a an n e ef ff fi ic ci ie en nt t a al ll lo oc ca at ti io on n o of f r re es so ou ur rc ce es s a an nd d p pr ro ov vi id de e a a s st tr ro on ng g f fo ou un nd da at ti io on n f fo or r e ec co on no om mi ic c g gr ro ow wt th h a an nd d d de ev ve el lo op pm me en nt t. . O Ot th he er rs s e em mp ph ha as si iz ze e o on n t th he e G Go ov v’ ’t ts s c co ou ul ld d p pl la ay y i in n m ma ai in nt ta ai in ni in ng g a a h he ea al lt th hy y e ec co on no om mi ic c a an nd d s so oc ci ia al l e en nv vi ir ro on nm me en nt t i in n w wh hi ic ch h e en nt te er rp pr ri is se es s a an nd d t th he ei ir r c cu us st to om me er rs s c ca an n i in nt te er ra ac ct t w wi it th h c co on nf fi id de en nc ce e. . T Th he e f fo ol ll lo ow wi in ng g a ar re e s so om me e o of f t th he e v vi ie ew ws s f fo or r o or r a ag ga ai in ns st t f fi in na an nc ci ia al l m ma ar rk ke et t r re eg gu ul la at ti io on ns s: :   R Re eg gu ul la at ti io on n f fo or r F Fi in na an nc ci ia al l S Sa af fe et ty y M Ma an ny y r re eg gu ul la at ti io on ns s i in n t th he e f fi in na an nc ci ia al l i in ns st ti it tu ut ti io on ns s’ ’ s se ec ct to or r s sp pr ri in ng g f fr ro om m t th he e a ab bi il li it ty y o of f s so om me e f fi in na an nc ci ia al l i in ns st ti it tu ut ti io on ns s t to o c cr re ea at te e m mo on ne ey y i in n t th he e f fo or rm m o of f c cr re ed di it t c ca ar rd ds s, , c ch he ec ck ka ab bl le e d de ep po os si it ts s, , a an nd d o ot th he er r a ac cc co ou un nt ts s t th ha at t c ca an n b be e u us se ed d t to o m ma ak ke e p pa ay ym me en nt ts s f fo or r p pu ur rc ch ha as se e o of f g go oo od ds s a an nd d s se er rv vi ic ce es s. . S Su uc ch h c cr re ea at ti io on n o of f m mo on ne ey y i is s c cl lo os se el ly y a as ss so oc ci ia at te ed d w wi it th h i in nf fl la at ti io on n w wh hi ic ch h s sh ho ou ul ld d b be e m ma an na ag ge ed d b by y t th he e g go ov v’ ’t t. . F Fi in na an nc ci ia al l r re eg gu ul la at ti io on n a ar ri is se es s f fr ro om m t th he e r ri is sk ks s a at tt ta ac ch hi in ng g t to o f fi in na an nc ci ia al l p pr ro om mi is se es s. . W Wh hi il le e i in n s so om me e o ot th he er r i in nd du us st tr ri ie es s s sa af fe et ty y r re eg gu ul la at ti io on n a ai im ms s t to o e el li im mi in na at te e r ri is sk k a al lm mo os st t e en nt ti ir re el ly y ( (f fo or r e ex xa am mp pl le e, , t to o e el li im mi in na at te e h he ea al lt th h r ri is sk ks s i in n f fo oo od d p pr re ep pa ar ra at ti io on n) ), , t th hi is s i is s n no ot t a an n a ap pp pr ro op pr ri ia at te e a ai im m f fo or r m mo os st t a ar re ea as s o of f t th he e f fi in na an nc ci ia al l a ac ct ti iv vi it ti ie es s. . O On ne e o of f t th he e v vi it ta al l e ec co on no om mi ic c f fu un nc ct ti io on ns s o of f t th he e f fi in na an nc ci ia al l i in ns st ti it tu ut ti io on ns s i is s t to o m ma an na ag ge e, , a al ll lo oc ca at te e a an nd d p pr ri ic ce e r ri is sk k. . H Ho ow we ev ve er r, , t th he er re e a ar re e s so om me e a ar re ea as s o of f t th he e f fi in na an nc ci ia al l a ac ct ti iv vi it ti ie es s w wh he er re e g go ov ve er rn nm me en nt t i in nt te er rv ve en nt ti io on n i is s a ai im me ed d a at t e el li im mi in na at te e r re ed du uc ci in ng g r ri is sk k. . O On ne e o of f t th he e m mo os st t d di if ff fi ic cu ul lt t t ta as sk ks s
  • 22. Financial Institutions and Market (Chapter Three) 22 f fa ac ci in ng g t th ho os se e c ch ha ar rg ge ed d w wi it th h d de es si ig gn ni in ng g f fi in na an nc ci ia al l m ma ar rk ke et t r re eg gu ul la at ti io on ns s i is s t th ha at t o of f d de ef fi in ni in ng g t th he e a ai im ms s a an nd d b bo ou un nd da ar ri ie es s o of f r re eg gu ul la at ti io on n f fo or r f fi in na an nc ci ia al l s sa af fe et ty y. . I In n e es ss se en nc ce e, , t th he e t ta as sk k i is s t to o d de ec ci id de e w wh hi ic ch h f fi in na an nc ci ia al l p pr ro om mi is se es s h ha av ve e c ch ha ar ra ac ct te er ri is st ti ic cs s t th ha at t w wa ar rr ra an nt t m mu uc ch h h hi ig gh he er r l le ev ve el ls s o of f s sa af fe et ty y t th ha an n w wo ou ul ld d o ot th he er rw wi is se e b be e p pr ro ov vi id de ed d b by y m ma ar rk ke et ts s ( (e ev ve en n w wh he en n t th he ey y a ar re e s su ub bj je ec ct t t to o e ef ff fe ec ct ti iv ve e c co on nd du uc ct t, , d di is sc cl lo os su ur re e a an nd d c co om mp pe et ti it ti io on n r re eg gu ul la at ti io on n) ). . A As s a a g ge en ne er ra al l p pr ri in nc ci ip pl le e, , f fi in na an nc ci ia al l s sa af fe et ty y r re eg gu ul la at ti io on n w wi il ll l b be e r re eq qu ui ir re ed d w wh he er re e p pr ro om mi is se es s a ar re e j ju ud dg ge ed d t to o b be e v ve er ry y d di if ff fi ic cu ul lt t t to o h ho on no or r a an nd d a as ss se es ss s, , a an nd d p pr ro od du uc ce e h hi ig gh hl ly y a ad dv ve er rs se e c co on ns se eq qu ue en nc ce es s i if f b br re ea ac ch he ed d. . P Pr ro om mi is se es s w wh hi ic ch h r ra an nk k h hi ig gh hl ly y o on n t th he es se e c ch ha ar ra ac ct te er ri is st ti ic cs s a ar re e r re ef fe er rr re ed d t to o a as s h ha av vi in ng g a a h hi ig gh h ‘ ‘i in nt te en ns si it ty y’ ’. . T Th he e h hi ig gh he er r t th he e i in nt te en ns si it ty y o of f a a p pr ro om mi is se e, , t th he e s st tr ro on ng ge er r t th he e c ca as se e f fo or r r re eg gu ul la at ti io on n t to o r re ed du uc ce e t th he e l li ik ke el li ih ho oo od d o of f b br re ea ac ch h. . i i. . S Sy ys st te em mi ic c S St ta ab bi il li it ty y T Th he e f fi ir rs st t c ca as se e f fo or r r re eg gu ul la at ti io on n t to o p pr re ev ve en nt t s sy ys st te em mi ic c i in ns st ta ab bi il li it ty y a ar ri is se es s b b/ /s se e c ce er rt ta ai in n f fi in na an nc ci ia al l p pr ro om mi is se es s h ha av ve e a an n i in nh he er re en nt t c ca ap pa ac ci it ty y t to o t tr ra an ns sm mi it t i in ns st ta ab bi il li it ty y t to o t th he e r re ea al l e ec co on no om my y, , i in nd du uc ci in ng g u un nd de es si ir re ed d e ef ff fe ec ct ts s o on n o ou ut tp pu ut t, , e em mp pl lo oy ym me en nt t a an nd d p pr ri ic ce e i in nf fl la at ti io on n. . T Th he e m mo or re e s so op ph hi is st ti ic ca at te ed d t th he e e ec co on no om my y, , t th he e g gr re ea at te er r i it ts s d de ep pe en nd de en nc ce e o on n f fi in na an nc ci ia al l p pr ro om mi is se es s a an nd d t th he e g gr re ea at te er r i it ts s v vu ul ln ne er ra ab bi il li it ty y t to o f fa ai il lu ur re e o of f t th he e f fi in na an nc ci ia al l s sy ys st te em m. . T Th he e s st tr ro on ng ge es st t s so ou ur rc ce e o of f s sy ys st te em mi ic c r ri is sk k i is s f fi in na an nc ci ia al l i in nf fe ec ct ti io on n. . T Th hi is s o oc cc cu ur rs s w wh he en n f fi in na an nc ci ia al l d di is st tr re es ss s i in n o on ne e m ma ar rk ke et t o or r i in ns st ti it tu ut ti io on n i is s c co om mm mu un ni ic ca at te ed d t to o o ot th he er rs s a an nd d, , e ev ve en nt tu ua al ll ly y, , e en ng gu ul lf fs s t th he e e en nt ti ir re e s sy ys st te em m. . T Th he e p po os si it ti io on n o of f b ba an nk ks s a as s t th he e m ma ai in n p pr ro ov vi id de er rs s o of f p pa ay ym me en nt ts s s se er rv vi ic ce es s a ad dd ds s t to o r ri is sk k t th ha at t b ba an nk k f fa ai il lu ur re e m mi ig gh ht t d di is sr ru up pt t t th he e i in nt te eg gr ri it ty y o of f t th he e p pa ay ym me en nt ts s s sy ys st te em m a an nd d p pr re ec ci ip pi it ta at te e a a w wi id de er r e ec co on no om mi ic c c cr ri is si is s. . i ii i. . I In nf fo or rm ma at ti io on n A As sy ym mm me et tr ry y T Th he e s se ec co on nd d c ca as se e f fo or r r re eg gu ul la at ti io on n r re el la at te es s t to o t th he e n ne ee ed d t to o a ad dd dr re es ss s i in nf fo or rm ma at ti io on n a as sy ym mm me et tr ry y. . I In n a a m ma ar rk ke et t e ec co on no om my y, , c co on ns su um me er rs s a ar re e a as ss su um me ed d, , f fo or r t th he e m mo os st t p pa ar rt t, , t to o t th he e b be es st t j ju ud dg ge es s o of f t th he ei ir r o ow wn n i in nt te er re es st ts s. . I In n s su uc ch h c ca as se es s, , d di is sc cl lo os su ur re e r re eq qu ui ir re em me en nt ts s p pl la ay y a an n i im mp po or rt ta an nt t r ro ol le e i in n a as ss si is st ti in ng g c co on ns su um me er rs s t to o m ma ak ke e i in nf fo or rm me ed d j ju ud dg gm me en nt ts s. . H Ho ow we ev ve er r, , d di is sc cl lo os su ur re e i is s n no ot t a al lw wa ay ys s s su uf ff fi ic ci ie en nt t. . F Fo or r m ma an ny y f fi in na an nc ci ia al l p pr ro od du uc ct ts s, , c co on ns su um me er rs s l la ac ck k ( (a an nd d c ca an nn no ot t e ef ff fi ic ci ie en nt tl ly y o ob bt ta ai in n) ) t th he e k kn no ow wl le ed dg ge e, , e ex xp pe er ri ie en nc ce e o or r j ju ud dg gm me en nt t r re eq qu ui ir re ed d t to o m ma ak ke e d di is sc cl lo os su ur re e, , n no o m ma at tt te er r h ho ow w h hi ig gh h q qu ua al li it ty y o or r c co om mp pr re eh he en ns si iv ve e, , c ca an nn no ot t o ov ve er rc co om me e m ma ar rk ke et t f fa ai il lu ur re e. . I In n t th he es se e c ca as se es s, , i it t m ma ay y b be e d de es si ir ra ab bl le e t to o s su ub bs st ti it tu ut te e t th he e o op pi in ni io on n o of f a a t th hi ir rd d p pa ar rt ty y f fo or r t th ha at t o of f c co on ns su um me er rs s t th he em ms se el lv ve es s. . I In n e ef ff fe ec ct t, , t th he e t th hi ir rd d p pa ar rt ty y i is s e ex xp pe ec ct te ed d t to o b be eh ha av ve e p pa at te er rn na al li is st ti ic ca al ll ly y, , l lo oo ok ki in ng g o ou ut t f fo or r t th he e b be es st t i in nt te er re es st ts s o of f c co on ns su um me er rs s w wh he en n t th he ey y a ar re e c co on ns si id de er re ed d i in nc ca ap pa ab bl le e o of f d do oi in ng g s so o a al lo on ne e. . T To o s so om me e e ex xt te en nt t, , s su uc ch h t th hi ir rd d p pa ar rt ti ie es s c ca an n b be e s su up pp pl li ie ed d b by y m ma ar rk ke et ts s ( (s su uc ch h a as s t th he e
  • 23. Financial Institutions and Market (Chapter Three) 23 r ro ol le e p pl la ay ye ed d b by y s se el lf f r re eg gu ul la at to or ry y a as ss so oc ci ia at ti io on ns s) ). . H Ho ow we ev ve er r, , f fo or r m ma an ny y y ye ea ar rs s t th he e p pr ra ac ct ti ic ce e i in n a al ll l c co ou un nt tr ri ie es s h ha as s b be ee en n f fo or r g go ov v’ ’t t p pr ru ud de en nt ti ia al l r re eg gu ul la at to or rs s t to o t ta ak ke e o on n m mu uc ch h o of f t th hi is s r ro ol le e. .   R Re eg gu ul la at to or ry y A As ss su ur ra an nc ce e A A c co on nc ce er rn n a ab bo ou ut t t th he e s sa af fe et ty y o of f t th he e p pu ub bl li ic c’ ’s s f fu un nd ds s, , e es sp pe ec ci ia al ll ly y t th he e s sa av vi in ng gs s o ow wn ne ed d b by y m mi il ll li io on ns s o of f i in nd di iv vi id du ua al ls s a an nd d f fa am mi il li ie es s, , h ho ow we ev ve er r, , d do oe es s n no ot t m me ea an n t th ha at t a al ll l f fi in na an nc ci ia al l s se er rv vi ic ce es s s sh ho ou ul ld d b be e s su ub bj je ec ct t t to o f fi in na an nc ci ia al l s sa af fe et ty y r re eg gu ul la at ti io on n. . I If f r re eg gu ul la at ti io on n i is s p pu ur rs su ue ed d t to o t th he e p po oi in nt t o of f e en ns su ur ri in ng g t th ha at t p pr ro om mi is se es s a ar re e k ke ep pt t u un nd de er r a al ll l c ci ir rc cu um ms st ta an nc ce es s, , t th he e b bu ur rd de en n o of f h ho on no or r i is s e ef ff fe ec ct ti iv ve el ly y s sh hi if ft te ed d f fr ro om m t th he e p pr ro om mi is so or r t to o t th he e r re eg gu ul la at to or r. . A Al ll l p pr ro om mi is so or rs s w wo ou ul ld d b be ec co om me e e eq qu ua al ll ly y r ri is sk ky y ( (o or r r ri is sk k f fr re ee e) ) i in n t th he e e ey ye es s o of f t th he e i in nv ve es st ti in ng g p pu ub bl li ic c. . R Re eg gu ul la at ti io on n a at t t th hi is s i in nt te en ns si it ty y r re em mo ov ve es s t th he e n na at tu ur ra al l s sp pe ec ct tr ru um m o of f r ri is sk k t th ha at t i is s f fu un nd da am me en nt ta al l t to o f fi in na an nc ci ia al l m ma ar rk ke et ts s. . I If f i it t w we er re e e ex xt te en nd de ed d w wi id de el ly y, , t th he e c co om mm mu un ni it ty y w wo ou ul ld d b be e c co ol ll le ec ct ti iv ve el ly y u un nd de er rw wr ri it ti in ng g a al ll l f fi in na an nc ci ia al l r ri is sk ks s t th hr ro ou ug gh h t th he e t ta ax x s sy ys st te em m, , a an nd d m ma ar rk ke et ts s w wo ou ul ld d c ce ea as se e t to o w wo or rk k e ef ff fi ic ci ie en nt tl ly y. . T Th hu us s, , r re eg gu ul la at ti io on n c ca an nn no ot t a an nd d s sh ho ou ul ld d n no ot t e en ns su ur re e t th ha at t a al ll l f fi in na an nc ci ia al l p pr ro om mi is se es s a ar re e k ke ep pt t. . T Th he e g go ov v’ ’t t s sh ho ou ul ld d n no ot t p pr ro ov vi id de e a an n a ab bs so ol lu ut te e g gu ua ar ra an nt te ee e i in n a an ny y a ar re ea a o of f t th he e f fi in na an nc ci ia al l s sy ys st te em m ( (j ju us st t a as s i it t d do oe es s n no ot t d do o s so o i in n o ot th he er r a ar re ea as s) ). . P Pr ri im ma ar ry y r re es sp po on ns si ib bi il li it ty y s sh ho ou ul ld d r re em ma ai in n w wi it th h t th ho os se e w wh ho o m ma ak ke e f fi in na an nc ci ia al l p pr ro om mi is se es s. . I It t w wo ou ul ld d b be e i in ne eq qu ui it ta ab bl le e f fo or r t th he e g go ov v’ ’t t t to o u un nd de er rw wr ri it te e s so om me e f fi in na an nc ci ia al l p pr ro om mi is se es s b bu ut t n no ot t o ot th he er r p pr ro om mi is se es s m ma ad de e b by y p pa ar rt ti ic ci ip pa an nt ts s i in n t th he e b br ro oa ad de er r e ec co on no om my y. . H Ho ow w i in nt te en ns si iv ve el ly y, , t th he en n, , s sh ho ou ul ld d f fi in na an nc ci ia al l s sa af fe et ty y r re eg gu ul la at ti io on n b be e a ap pp pl li ie ed d? ? H Ho ow w m mu uc ch h r re eg gu ul la at to or ry y a as ss su ur ra an nc ce e s sh ho ou ul ld d i it t p pr ro ov vi id de e i in n t th he e v va ar ri io ou us s a ar re ea as s o of f t th he e f fi in na an nc ci ia al l s sy ys st te em m? ? A An nd d o ot th he er r q qu ue es st ti io on ns s a ar re e s st ti il ll l a a p po oi in nt t o of f d di is sc cu us ss si io on n. . T Th he eo or re et ti ic ca al ll ly y, , h ho ow we ev ve er r, , t th he e i in nt te en ns si it ty y o of f f fi in na an nc ci ia al l s sa af fe et ty y r re eg gu ul la at ti io on n s sh ho ou ul ld d b be e p pr ro op po or rt ti io on na al l t to o t th he e i in nt te en ns si it ty y o of f f fi in na an nc ci ia al l p pr ro om mi is se es s. . T Th he e m mo os st t i in nt te en ns se e f fi in na an nc ci ia al l p pr ro om mi is se es s a ar re e t th ho os se e w wh hi ic ch h p pr ro ov vi id de e p pa ay ym me en nt ts s s se er rv vi ic ce es s. . S Su uc ch h p pr ro om mi is se es s a ar re e i in nt tr ri in ns si ic ca al ll ly y d di if ff fi ic cu ul lt t t to o h ho on no or r. . T Th ho os se e w wh ho o u us se e t th he em m r ra ar re el ly y h ha av ve e t th he e t ti im me e, , m mo ot ti iv va at ti io on n o or r r re es so ou ur rc ce es s t to o a as ss se es ss s t th he e r ri is sk ks s, , a an nd d a an ny y b br re ea ac ch h w wo ou ul ld d h ha av ve e p po ot te en nt ti ia al ll ly y h hi ig gh hl ly y a ad dv ve er rs se e c co on ns se eq qu ue en nc ce es s f fo or r t th he e e ef ff fi ic ci ie en nt t c co on nd du uc ct t o of f c co om mm me er rc ce e i in n t th he e w wh ho ol le e e ec co on no om my y. . T Th he e m mo os st t i in nt te en ns se e s sa af fe et ty y r re eg gu ul la at ti io on n s sh ho ou ul ld d t th he er re ef fo or re e a ap pp pl ly y t to o t th he e p pr ro ov vi is si io on n o of f m me ea an ns s o of f p pa ay ym me en nt t, , t to o t th he e p po oi in nt t o of f s se ec cu ur ri in ng g t th he ei ir r s sa af fe et ty y a at t t th he e h hi ig gh he es st t p po os ss si ib bl le e l le ev ve el l, , s sh ho or rt t o of f a an n o ou ut tr ri ig gh ht t g go ov ve er rn nm me en nt t g gu ua ar ra an nt te ee e. . B Be ey yo on nd d t th hi is s, , t th he e e ex xt te en nt t o of f r re eg gu ul la at to or ry y a as ss su ur ra an nc ce e i is s a a m ma at tt te er r f fo or r j ju ud dg gm me en nt t. . W Wh he er re e s sy ys st te em mi ic c r ri is sk k a an nd d i in nf fo or rm ma at ti io on n a as sy ym mm me et tr ry y a ar re e g gr re ea at te es st t, , r re eg gu ul la at ti io on n s sh ho ou ul ld d a at t l le ea as st t s st tr ri iv ve e t to o m mi in ni im mi iz ze e t th he e r ri is sk k o of f p pr ro om mi is se es s b be ei in ng g d di is sh ho on no or re ed d. . I If f r re eg gu ul la at ti io on n s st to op ps s s sh ho or rt t o of f p pr ro ov vi id di in ng g a a g gu ua ar ra an nt te ee e a ag ga ai in ns st t f fa ai il lu ur re e, , i it t m mu us st t p pr ro ov vi id de e s sp pe ee ed dy y a an nd d e ef ff fi ic ci ie en nt t m me ec ch ha an ni is sm ms s f fo or r r re es so ol lv vi in ng g f fi in na an nc ci ia al l d di is st tr re es ss s w wh he en n i it t a ar ri is se es s, , s so o a as s t to o m mi in ni im mi iz ze e t th he e d da an ng ge er r o of f l lo os ss s o or r c co on nt ta ag gi io on n. . A At t a a m mi in ni im mu um m, , t th hi is s r re eq qu ui ir re es s t th ha at t t th he e r re eg gu ul la at to or r h ha av ve e u un na am mb bi ig gu uo ou us s p po ow we er rs s t to o i in nt te er rv ve en ne e i in n t th he e o op pe er ra at ti io on ns s o of f i in ns st ti it tu ut ti io on ns s m ma ak ki in ng g s su uc ch h i in nt te en ns se e p pr ro om mi is se es s. .
  • 24. Financial Institutions and Market (Chapter Three) 24 R Re eg gu ul la at ti io on n s sh ho ou ul ld d s se ee ek k t to o e en ns su ur re e t th ha at t, , w wh hi il le e r ri is sk k r re em ma ai in ns s, , t th ho os se e m ma ak ki in ng g p pr ro om mi is se es s e en ns su ur re e t th ha at t r ri is sk ks s a ar re e a ap pp pr ro op pr ri ia at te el ly y m ma an na ag ge ed d i in n a ac cc co or rd da an nc ce e w wi it th h t th he e r re ea as so on na ab bl le e e ex xp pe ec ct ta at ti io on ns s o of f t th he ei ir r p pr ro om mi is se es s. .   R Re eg gu ul la at ti io on n f fo or r S So oc ci ia al l P Pu ur rp po os se es s A A f fu ur rt th he er r c ca as se e f fo or r r re eg gu ul la at ti io on n i is s s so om me et ti im me es s m ma ad de e o on n t th he e g gr ro ou un nd ds s t th ha at t f fi in na an nc ci ia al l i in ns st ti it tu ut ti io on ns s h ha av ve e ‘ ‘c co om mm mu un ni it ty y s se er rv vi ic ce e o ob bl li ig ga at ti io on ns s’ ’ t to o p pr ro ov vi id de e s su ub bs si id di ie es s t to o s so om me e c cu us st to om me er r g gr ro ou up ps s. . F Fo or r e ex xa am mp pl le e, , f fi in na an nc ci ia al l i in ns st ti it tu ut ti io on ns s a ar re e u ur rg ge ed d t to o d de el li iv ve er r c ce er rt ta ai in n s se er rv vi ic ce es s f fr re ee e o of f c ch ha ar rg ge e o or r a at t a a p pr ri ic ce e b be el lo ow w t th he e c co os st t o of f p pr ro ov vi is si io on n. . T Th hi is s i is s t th he e l le ea as st t i in nf fl lu ue en nt ti ia al l c ca as se e f fo or r i in nt te er rv ve en nt ti io on n. . F Fi in na an nc ci ia al l i in ns st ti it tu ut ti io on ns s, , l li ik ke e o ot th he er r b bu us si in ne es ss s c co or rp po or ra at ti io on ns s, , a ar re e d de es si ig gn ne ed d t to o p pr ro od du uc ce e w we ea al lt th h, , n no ot t t to o r re ed di is st tr ri ib bu ut te e i it t. . T Th hi is s i is s n no ot t t to o s sa ay y t th ha at t t th he ei ir r c cr re ea at ti io on n o of f w we ea al lt th h s sh ho ou ul ld d i ig gn no or re e t th he e c cl la ai im ms s o of f s so oc ci ia al l a an nd d m mo or ra al l p pr ro op pr ri ie et ty y. . B Bu ut t i it t i is s a an no ot th he er r t th hi in ng g e en nt ti ir re el ly y t to o r re eq qu ui ir re e f fi in na an nc ci ia al l i in ns st ti it tu ut ti io on ns s t to o u un nd de er rt ta ak ke e s so oc ci ia al l r re es sp po on ns si ib bi il li it ti ie es s f fo or r w wh hi ic ch h t th he ey y a ar re e n no ot t d de es si ig gn ne ed d o or r w we el ll l s su ui it te ed d. . O Ob bl li ig gi in ng g f fi in na an nc ci ia al l i in ns st ti it tu ut ti io on ns s t to o s su ub bs si id di ie es s s so om me e a ac ct ti iv vi it ti ie es s c co om mp pr ro om mi is se es s t th he ei ir r e ef ff fi ic ci ie en nc cy y a an nd d i is s u un nl li ik ke el ly y t to o p pr ro ov ve e s su us st ta ai in na ab bl le e i in n a a c co om mp pe et ti it ti iv ve e m ma ar rk ke et t. . 5 5. .3 3. . R Re eg gu ul la at ti io on ns s o of f F Fi in na an nc ci ia al l I In ns st ti it tu ut ti io on ns s 1 1) ) R Re eg gu ul la at ti io on n o of f c co om mm me er rc ci ia al l b ba an nk ks s D Du ue e t to o t th he ei ir r i im mp po or rt ta an nc ce e i in n t th he e f fi in na an nc ci ia al l s sy ys st te em m, , c co om mm me er rc ci ia al l b ba an nk ks s a ar re e t ty yp pi ic ca al ll ly y t th he e m mo os st t r re eg gu ul la at te ed d o of f a al ll l f fi in na an nc ci ia al l i in ns st ti it tu ut ti io on ns s. . O On ne e o of f t th he e a ar re ea as s w wh he er re e s st ta at te e a an nd d f fe ed de er ra al l r re eg gu ul la at to or rs s h ha av ve e e ex xe er rc ci is se ed d t th he e m mo os st t i in nf fl lu ue en nc ce e o ov ve er r b ba an nk ki in ng g i is s: :   C Co on nt tr ro ol ll li in ng g w wh ha at t n ne ew w g ge eo og gr ra ap ph hi ic c m ma ar rk ke et ts s b ba an nk ks s c ca an n e en nt te er r w wi it th h t th he ei ir r o of ff fi ic ce es s. .   T Th hr ro ou ug gh h t th he e r re eg gu ul la at ti io on n o of f t th he e s se er rv vi ic ce es s t th ha at t b ba an nk ks s c ca an n o of ff fe er r. . U Un nf fo or rt tu un na at te el ly y, , r re eg gu ul la at ti io on ns s h ha av ve e b be ee en n t ti ig gh ht t a an nd d s so om me et ti im me es s f fi ir rm m i in n t th hi is s a ar re ea a o ou ut t o of f c co on nc ce er rn n f fo or r b ba an nk k s sa af fe et ty y ( (a as s s se er rv vi ic ce e i in nn no ov va at ti io on n c ca an n b be e h hi ig gh hl ly y r ri is sk ky y) ) a an nd d b be ec ca au us se e o of f a a d de es si ir re e t to o p pr ro ot te ec ct t c ce er rt ta ai in n n no on nb ba an nk k f fi in na an nc ci ia al l i in ns st ti it tu ut ti io on ns s, , s su uc ch h a as s c cr re ed di it t u un ni io on ns s, , s sa av vi in ng gs s a an nd d l lo oa an ns s, , a an nd d i in ns su ur ra an nc ce e c co om mp pa an ni ie es s, , f fr ro om m h ha ar rd d b ba an nk k c co om mp pe et ti it ti io on n. . F Fo or r e ex xa am mp pl le e, , p pr ro ob ba ab bl ly y t th he e m mo os st t i in nf fl lu ue en nt ti ia al l l la aw w i in n A Am me er ri ic ca an n h hi is st to or ry y i in n d de ef fi in ni in ng g b ba an nk k s se er rv vi ic ce e p po ow we er rs s w wa as s t th he e G Gl la as ss s- -S St te ea ag ga al ll l A Ac ct t ( (o or r B Ba an nk ki in ng g A Ac ct t) ) o of f 1 19 93 33 3. . T Th hi is s s sw we ee ep pi in ng g l la aw w c co on nf fi in ne ed d b ba an nk k s se er rv vi ic ce e p po ow we er rs s e es ss se en nt ti ia al ll ly y t to o t th he e m ma ak ki in ng g o of f l lo oa an ns s a an nd d t th he e t ta ak ki in ng g o of f d de ep po os si it ts s, , w wh hi il le e i in ns su ur ra an nc ce e s se er rv vi ic ce es s w we er re e l la ar rg ge el ly y r re el le eg ga at te ed d t to o i in ns su ur ra an nc ce e c co om mp pa an ni ie es s, , a an nd d h ho om me e l le en nd di in ng g w wa as s c ce en nt te er re ed d i in n s sa av vi in ng gs s a an nd d l lo oa an n a as ss so oc ci ia at ti io on ns s a an nd d s sa av vi in ng gs s b ba an nk ks s. . U U. .S S. . b ba an nk ke er rs s a al ls so o l lo os st t a an n i im mp po or rt ta an nt t s se er rv vi ic ce e p po ow we er r t th he ey y p po os ss se es ss se ed d i in n t th he e d de ec ca ad de es s b be ef fo or re e G Gl la as ss s- -S St te ea ag ga al ll l- - p po ow we er r t to o a as ss si is st t t th he ei ir r l la ar rg ge es st t c co or rp po or ra at te e c cu us st to om me er rs s b by y p pu ur rc ch ha as si in ng g c co or rp po or ra at te e s st to oc ck k a an nd d t th he en n r re es se el ll li in ng g i it t i in n t th he e o op pe en n m ma ar rk ke et t. . F Fo or re ei ig gn n b ba an nk ks s h ha av ve e c co on nt ti in nu ue ed d t to o o of ff fe er r c co or rp po or ra at te e b bo on nd d a an nd d s st to oc ck k u un nd de er rw wr ri it ti in ng g s se er rv vi ic ce es s t to o A Am me er ri ic ca an n c co om mp pa an ni ie es s, , a an nd d
  • 25. Financial Institutions and Market (Chapter Three) 25 U U. .S S. . b ba an nk ks s a ar re e a ac ct ti iv ve e i in n t th he e s se ec cu ur ri it ty y u un nd de er rw wr ri it ti in ng g b bu us si in ne es ss s o ov ve er rs se ea as s t th hr ro ou ug gh h a a v va ar ri ie et ty y o of f a af ff fi il li ia at te ed d o or rg ga an ni iz za at ti io on ns s, , b bu ut t t th he ey y h ha av ve e c cl le ea ar rl ly y l lo os st t c cu us st to om me er rs s t to o s se ec cu ur ri it ty y d de ea al le er rs s a an nd d f fo or re ei ig gn n b ba an nk ks s ( (p pr ri in nc ci ip pa al ll ly y f fr ro om m C Ca an na ad da a a an nd d W We es st te er rn n E Eu ur ro op pe e) ) i in n d do om me es st ti ic c u un nd de er rw wr ri it ti in ng g, , e ex xc ce ep pt t f fo or r u un nd de er rw wr ri it ti in ng g t th ho os se e t ty yp pe es s o of f s se ec cu ur ri it ti ie es s w wh he er re e e ex xc ce ep pt ti io on ns s h ha av ve e b be ee en n g gr ra an nt te ed d f fr ro om m f fe ed de er ra al l r re es st tr ri ic ct ti io on ns s. . B Ba an nk ke er rs s h ha av ve e a av vi id dl ly y s so ou ug gh ht t s se ec cu ur ri it ty y u un nd de er rw wr ri it ti in ng g p po ow we er rs s b be ec ca au us se e t th hi is s b bu us si in ne es ss s c ca an n b be e h hi ig gh hl ly y p pr ro of fi it ta ab bl le e a an nd d i it t c co om mp pl le em me en nt ts s t tr ra ad di it ti io on na al l l le en nd di in ng g s se er rv vi ic ce es s. . O On ne e o of f t th he e m mo os st t r ra ap pi id dl ly y e ex xp pa an nd di in ng g a ar re ea as s o of f b ba an nk ki in ng g r re eg gu ul la at ti io on n t to od da ay y c ce en nt te er rs s a ar ro ou un nd d d di is sc cl lo os su ur re e r ru ul le es s— — r re eg gu ul la at ti io on ns s r re eq qu ui ir ri in ng g f fi in na an nc ci ia al l i in ns st ti it tu ut ti io on ns s t to o r re ev ve ea al l c ce er rt ta ai in n i in nf fn n t to o c cu us st to om me er rs s ( (i in n a an n e ef ff fo or rt t t to o e en nc co ou ur ra ag ge e s sh ho op pp pi in ng g a ar ro ou un nd d a an nd d a av vo oi id d d de ec ce ep pt ti io on n) ) a an nd d t to o r re eg gu ul la at to or rs s ( (t to o i im mp pr ro ov ve e s su up pe er rv vi is si io on n o of f t th he e b ba an nk ki in ng g i in nd du us st tr ry y) ). . F Fo or r e ex xa am mp pl le e, , b ba an nk ks s c co ou ul ld d b be e r re eq qu ui ir re ed d t to o d di is sc cl lo os su ur re e o of f a al ll l t th he e i in nt te er re es st t a an nd d f fe ee es s a as ss so oc ci ia at te ed d w wi it th h s se el ll li in ng g l lo oa an ns s a an nd d d de ep po os si it ts s t to o i in nd di iv vi id du ua al ls s w wh ho o a ar re e b ba an nk k c cu us st to om me er rs s. . S Si im mi il la ar rl ly y, , i in n c ca as se e o of f h ho om me e m mo or rt tg ga ag ge e, , b ba an nk ks s c co ou ul ld d b be e r re eq qu ui ir re ed d t to o r re ep po or rt t t to o t th he e p pu ub bl li ic c a an nd d t to o r re eg gu ul la at to or rs s t th he e l lo oc ca at ti io on ns s o of f b bo ot th h t th he ei ir r a ap pp pr ro ov ve ed d a an nd d r re ej je ec ct te ed d a ap pp pl li ic ca at ti io on ns s f fo or r l lo oa an ns s t to o p pu ur rc ch ha as se e o or r i im mp pr ro ov ve e h ho om me es s a as s a a c ch he ec ck k o on n p po os ss si ib bl le e d di is sc cr ri im mi in na at ti io on n i in n l le en nd di in ng g. . A An no ot th he er r c co ou ul ld d b be e a a r re eq qu ui ir re em me en nt t o on n b ba an nk ks s a an nd d o ot th he er r d de ep po os si it to or ri ie es s t to o n no ot ti if fy y c cu us st to om me er rs s a an nd d r re eg gu ul la at to or rs s i in n a ad dv va an nc ce e w wh he en n b br ra an nc ch h o of ff fi ic ce es s a ar re e t to o b be e c cl lo os se ed d. . W Wo on nd de er rf fu ul l c ch ha an ng ge es s i in n b ba an nk ki in ng g r re eg gu ul la at ti io on n i in n r re ec ce en nt t y ye ea ar rs s- - i in nc cl lu ud di in ng g t th he e a ad do op pt ti io on n o of f n na at ti io on nw wi id de e b ba an nk ki in ng g a an nd d t th he e s sp pr re ea ad di in ng g i in nt te er rn na at ti io on na al li iz za at ti io on n o of f b ba an nk k r re eg gu ul la at ti io on n a as s e ev vi id de en nc ce ed d b by y t th he e B Ba as se el l A Ag gr re ee em me en nt t o on n b ba an nk k c ca ap pi it ta al l- - m mi ig gh ht t l le ea ad d u us s t to o t th hi in nk k t th ha at t t th he er re e i is s l li it tt tl le e l le ef ft t t to o d do o i in n r re es sh ha ap pi in ng g t th he e f fu ut tu ur re e s st tr ru uc ct tu ur re e o of f b ba an nk k r re eg gu ul la at ti io on n. . N No ot th hi in ng g c co ou ul ld d b be e f fu ur rt th he er r f fr ro om m t th he e t tr ru ut th h! ! B Ba an nk ki in ng g i in n t th he e U Un ni it te ed d S St ta at te es s ( (a an nd d i in n m mo os st t o ot th he er r c co ou un nt tr ri ie es s o of f t th he e w wo or rl ld d) ) r re em ma ai in ns s h he ea av vi il ly y b bu ur rd de en ne ed d b by y c co on ns st tr ra ai in ni in ng g g go ov v’ ’t t r ru ul le es s. . S Sl lo ow wl ly y a an nd d a al lo on ng g a a z zi ig gz za ag g p pa at th h, , b ba an nk ki in ng g i is s e ex xp pe er ri ie en nc ci in ng g a an n e er ra a o of f d de er re eg gu ul la at ti io on n, , a as s l le eg ga al l c co on ns st tr ra ai in nt ts s a ar re e b be ei in ng g l li if ft te ed d o on n a a f fe ew w b ba an nk ki in ng g a ac ct ti iv vi it ti ie es s. . 2 2) ) R Re eg gu ul la at ti io on n o of f i in ns su ur ra an nc ce e c co om mp pa an ni ie es s W Wh hi il le e n no ot t q qu ui it te e a as s h he ea av vi il ly y r re eg gu ul la at te ed d a as s c co om mm me er rc ci ia al l b ba an nk ks s, , i in ns su ur ra an nc ce e i in nt te er rm me ed di ia ar ri ie es s f fa ac ce e h ha ar rd d r ru ul le es s t th ha at t a ar re e i im mp po os se ed d p pr ri im ma ar ri il ly y b by y s st ta at te e g go ov v’ ’t ts s, , w wh hi ic ch h c cr re ea at te e i in ns su ur ra an nc ce e c co om mm mi is ss si io on ns s t to o r re eg gu ul la at te e t th he e i in nd du us st tr ry y. . F Fu un nd da am me en nt ta al l p pu ur rp po os se e o of f i in ns su ur ra an nc ce e c co om mp pa an ny y r re eg gu ul la at ti io on n i is s t to o e en ns su ur re e t th ha at t t th he e p pu ub bl li ic c i is s n no ot t o ov ve er rc ch ha ar rg ge ed d o or r p po oo or rl ly y s se er rv ve ed d a an nd d t to o g gu ua ar ra an nt te ee e a ad de eq qu ua at te e c co om mp pe en ns sa at ti io on n t to o i in ns su ur ra an nc ce e c co om mp pa an ni ie es s t th he em ms se el lv ve es s. . A A n ne ew w c co om mp pa an ny y m mu us st t b be e c ch ha ar rt te er re ed d u un nd de er r t th he e r ru ul le es s o of f a a p pa ar rt ti ic cu ul la ar r h ho om me e s st ta at te e. . O On nc ce e c ch ha ar rt te er re ed d, , e ea ac ch h c co om mp pa an ny y m mu us st t s su ub bm mi it t p pe er ri io od di ic c r re ep po or rt ts s t to o s st ta at te e c co om mm mi is ss si io on ns s, , i it ts s a ag ge en nt ts s m mu us st t b be e l li ic ce en ns se ed d b by y t th he e s st ta at te es s, , a an nd d t th he e t te er rm ms s o of f i it ts s p po ol li ic ci ie es s ( (i in nc cl lu ud di in ng g p pr re em mi iu um m r ra at te es s i it t c ch ha ar rg ge es s p po ol li ic cy yh ho ol ld de er rs s) ) m mu us st t b be e a ap pp pr ro ov ve ed d b by y s st ta at te e i in ns su ur ra an nc ce e c co om mm mi is ss si io on ns s. . B Bo ot th h c co ou ur rt ts s a an nd d s st ta at te e c co om mm mi is ss si io on ns s i in ns si is st t t th ha at t a an ny y i in nv ve es st tm me en nt ts s o of f i in nc co om mi in ng g p po ol li ic cy yh ho ol ld de er r p pr re em mi iu um ms s m mu us st t c co on nf fo or rm m t to o t th he e c co om mm mo on n l la aw w s st ta an nd da ar rd d o of f a a ‘ ‘p pr ru ud de en nt t p pe er rs so on n. .” ”
  • 26. Financial Institutions and Market (Chapter Three) 26 3 3) ) R Re eg gu ul la at ti io on n o of f p pe en ns si io on n f fu un nd ds s B B/ /s se e p pe en ns si io on n f fu un nd ds s h ha av ve e r ri is se en n r ra ap pi id dl ly y t to o h ho ol ld d t th he e b bu ul lk k o of f t th he e r re et ti ir re em me en nt t s sa av vi in ng gs s o of f m mi il ll li io on ns s o of f w wo or rk ke er rs s; ; t th he ey y h ha av ve e b be ee en n s su ub bj je ec ct t t to o m mu uc ch h h he ea av vi ie er r r re eg gu ul la at ti io on n b by y t th he e c co ou ur rt ts s a an nd d g go ov v’ ’t t a ag ge en nc ci ie es s. . B B/ /s se e e em mp pl lo oy ye er rs s- -t th he e p pr ri in nc ci ip pa al l c cr re ea at to or rs s a an nd d m ma an na ag ge er rs s o of f p pe en ns si io on n p pl la an ns s- - h ha av ve e a an n i in nc ce en nt ti iv ve e t to o t ta ak ke e o on n c co on ns si id de er ra ab bl le e r ri is sk k i in n a an n e ef ff fo or rt t t to o m mi in ni im mi iz ze e t th he e c co os st t b bu ur rd de en n t th he ey y m mu us st t c ca ar rr ry y, , m ma an ny y p pe en ns si io on n p pl la an ns s e ev ve en n t to od da ay y r re em ma ai in n o on nl ly y p pa ar rt ti ia al ll ly y f fu un nd de ed d- - t th ha at t i is s, , t th he e m ma ar rk ke et t v va al lu ue e o of f t th he ei ir r a as ss se et ts s p pl lu us s e ex xp pe ec ct te ed d i in nv v’ ’t t i in nc co om me e d do oe es s n no ot t f fu ul ll ly y c co ov ve er r a al ll l t th he e b be en ne ef fi it ts s p pr ro om mi is se ed d t to o p pe en ns si io on n p pl la an n m me em mb be er rs s. . W Wh hi il le e E En ng gl li is sh h c co om mm mo on n l la aw w r re eq qu ui ir re es s p pe en ns si io on n p pl la an ns s t to o b be e “ “p pr ru ud de en nt t” ” m ma an na ag ge er rs s o of f t th he ei ir r m me em mb be er rs s’ ’ r re et ti ir re em me en nt t s sa av vi in ng gs s, , m ma an ny y p pe en ns si io on ns s h ha av ve e b br ra an nc ch he ed d o ou ut t i in nt to o r ri is sk ki ie er r i in nv ve es st tm me en nt ts s, , i in nc cl lu ud di in ng g r re ea al l e es st ta at te e d de ev v’ ’t t p pr ro oj je ec ct ts s a an nd d d de er ri iv va at ti iv ve e s se ec cu ur ri it ti ie es s c co on nt tr ra ac ct ts s. . 4 4) ) R Re eg gu ul la at ti io on n o of f f fi in na an nc ce e c co om mp pa an ni ie es s F Fi in na an nc ce e c co om mp pa an ni ie es s a ar re e a am mo on ng g t th he e m mo os st t i im mp po or rt ta an nt t l le en nd de er rs s a an nd d b bu us si in ne es ss se es s i in n r re ec ce en nt t y ye ea ar rs s. . T Th he e b bu ul lk k o of f r re eg gu ul la at ti io on n o of f t th hi is s i in nd du us st tr ry y i is s a at t t th he e s st ta at te e l le ev ve el l a an nd d f fo oc cu us se es s p pr ri in nc ci ip pa al ll ly y o on n t th he e m ma ak ki in ng g o of f c co on ns su um me er r l lo oa an ns s. . S Se ev ve er ra al l s st ta at te es s i im mp po os se e m ma ax xi im mu um m l lo oa an n r ra at te es s s so o t th ha at t f fi in na an nc ce e c co om mp pa an ni ie es s a ar re e l li im mi it te ed d i in n t th he e a am mo ou un nt t o of f i in nt te er re es st t t th he ey y c ca an n c ch ha ar rg ge e c co on ns su um me er rs s, , w wh hi ic ch h t te en nd ds s t to o l li im mi it t t th he e v vo ol lu um me e o of f c cr re ed di it t e ex xt te en nd de ed d t to o r ri is sk ki ie er r h ho ou us se eh ho ol ld ds s. . T Th he e s st ta at te es s, , t tr ry yi in ng g t to o p pr ro ot te ec ct t c co on ns su um me er rs s, , a al ls so o u us su ua al ll ly y s sp pe el ll l o ou ut t t th he e r ru ul le es s f fo or r i in ns st ta al ll lm me en nt t l lo oa an n c co on nt tr ra ac ct ts s a an nd d t th he e c co on nd di it ti io on ns s u un nd de er r w wh hi ic ch h a au ut to om mo ob bi il le es s, , f fu ur rn ni it tu ur re e, , h ho om me e a ap pp pl li ia an nc ce es s, , o or r o ot th he er r h ho ou us se eh ho ol ld d a as ss se et ts s c ca an n b be e r re ep po os ss se es ss se ed d f fo or r n no on np pa ay ym me en nt t o of f a a l lo oa an n e ex xt te en nd de ed d b by y a a f fi in na an nc ce e c co om mp pa an ny y. . c co om mp pe et te en nt t