Finance Management
Chapter One
Why Are Financial Intermediaries Special?
Chapter Outline
Introduction
Financial Intermediaries’ Specialness
Information Costs
• Liquidity and Price Risk • Other Special Services
Other Aspects of Specialness
The Transmission of Monetary Policy
Credit Allocation
Intergenerational Wealth Transfers or Time Intermediation
Payment Services
Denomination Intermediation
Specialness and Regulation
Safety and Soundness Regulation
Monetary Policy Regulation
Credit Allocation Regulation
Consumer Protection Regulation
Investor Protection Regulation
Entry Regulation
The Changing Dynamics of Specialness
• Trends in the United States • Future Trends • Global Issues
Summary
Solutions for End-of-Chapter Questions and Problems: Chapter One
1. Identify and briefly explain the five risks common to financial institutions.
Default or credit risk of assets, interest rate risk caused by maturity mismatches between assets and liabilities, liability withdrawal or liquidity risk, underwriting risk, and operating cost risks.
2. Explain how economic transactions between household savers of funds and corporate users of funds would occur in a world without financial intermediaries (FIs).
In a world without FIs the users of corporate funds in the economy would have to approach directly the household savers of funds in order to satisfy their borrowing needs. This process would be extremely costly because of the up-front information costs faced by potential lenders. Cost inefficiencies would arise with the identification of potential borrowers, the pooling of small savings into loans of sufficient size to finance corporate activities, and the assessment of risk and investment opportunities. Moreover, lenders would have to monitor the activities of borrowers over each loan's life span. The net result
Why Are Financial Intermediaries Special?
Chapter Outline
Introduction
Financial Intermediaries’ Specialness
Information Costs
• Liquidity and Price Risk • Other Special Services
Other Aspects of Specialness
The Transmission of Monetary Policy
Credit Allocation
Intergenerational Wealth Transfers or Time Intermediation
Payment Services
Denomination Intermediation
Specialness and Regulation
Safety and Soundness Regulation
Monetary Policy Regulation
Credit Allocation Regulation
Consumer Protection Regulation
Investor Protection Regulation
Entry Regulation
The Changing Dynamics of Specialness
• Trends in the United States • Future Trends • Global Issues
Summary
Solutions for End-of-Chapter Questions and Problems: Chapter One
1. Identify and briefly explain the five risks common to financial institutions.
Default or credit risk of assets, interest rate risk caused by maturity mismatches between assets and liabilities, liability withdrawal or liquidity risk, underwriting risk, and operating cost risks.
2. Explain how economic transactions between household savers of funds and corporate users of funds would occur in a world without financial intermediaries (FIs).
In a world without FIs the users of corporate funds in the economy would have to approach directly the household savers of funds in order to satisfy their borrowing needs. This process would be extremely costly because of the up-front information costs faced by potential lenders. Cost inefficiencies would arise with the identification of potential borrowers, the pooling of small savings into loans of sufficient size to finance corporate activities, and the assessment of risk and investment opportunities. Moreover, lenders would have to monitor the activities of borrowers over each loan's life span. The net result