An Economic Analysis of Financial Structure
An Economic Analysis of Financial Structure
FACTS ABOUT FINANCIAL STRUCTURE
The financial system is complex and contains institutions like: Banks, insurance companies, mutual funds, stock and bond markets. The most important role of the financial markets is to channel funds from savers to people with productive investment opportunities. For the financial structure their are eight basic facts, where the four first emphasize the importance of financial intermediaries and the relative unimportance of securities markets for financing corporations. The first four tells about how stocks and bonds are relatively unimportant in financing corporations. And how indirect financing and financial intermediaries (ex. Bank loans) are by far the most used financing. The next four says how the financial sector is among the most regulated sector (5). How only large and well established companies can benefit from the financial markets (6). I also states that collateral is a common feature in most debt contracts (7). And it says that debt contracts are extremely complicated legal documents, which place many restrictions on the behavior of the borrowers (8).
TRANSACTION COST
Transaction costs and the size of securities posts are major problems in the financial markets. Only every second household in the states hold securities, which often is undiversified, this because of the size of the security posts and transaction costs. One way to reduce transaction costs is by using financial intermediaries like banks. Savers can also bundle up and buy in large volumes and then achieve economics of scale, reducing costs. This is also done through mutual funds. They sell shares to investors and reinvest the proceeds in shares and bonds, then achieving reduced risk and lower costs. Financial intermediaries also achieve expertise through specializing in trades also creating benefits.
ASYMTERIC INFORMATION
The analysis of how asymmetric information creates the root of many economical
FACTS ABOUT FINANCIAL STRUCTURE
The financial system is complex and contains institutions like: Banks, insurance companies, mutual funds, stock and bond markets. The most important role of the financial markets is to channel funds from savers to people with productive investment opportunities. For the financial structure their are eight basic facts, where the four first emphasize the importance of financial intermediaries and the relative unimportance of securities markets for financing corporations. The first four tells about how stocks and bonds are relatively unimportant in financing corporations. And how indirect financing and financial intermediaries (ex. Bank loans) are by far the most used financing. The next four says how the financial sector is among the most regulated sector (5). How only large and well established companies can benefit from the financial markets (6). I also states that collateral is a common feature in most debt contracts (7). And it says that debt contracts are extremely complicated legal documents, which place many restrictions on the behavior of the borrowers (8).
TRANSACTION COST
Transaction costs and the size of securities posts are major problems in the financial markets. Only every second household in the states hold securities, which often is undiversified, this because of the size of the security posts and transaction costs. One way to reduce transaction costs is by using financial intermediaries like banks. Savers can also bundle up and buy in large volumes and then achieve economics of scale, reducing costs. This is also done through mutual funds. They sell shares to investors and reinvest the proceeds in shares and bonds, then achieving reduced risk and lower costs. Financial intermediaries also achieve expertise through specializing in trades also creating benefits.
ASYMTERIC INFORMATION
The analysis of how asymmetric information creates the root of many economical