Summary Financial Markets and Institutions A European Perspective Book cover image

Summary Financial Markets and Institutions A European Perspective

- Jakob de Haan, et al
ISBN-10 110702594X ISBN-13 9781107025943
211 Flashcards & Notes
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A snapshot of the summary - Financial Markets and Institutions A European Perspective Author: Jakob de Haan Sander Oosterloo Dirk Schoenmaker ISBN: 9781107025943

  • 1 Functions of Financial System

  • What is the main task of the financial system?
    It is to channel funds form sectors that have a surplus to sectors that have a shortage of funds
  • What does the financial system consist of?
    All financial intermediaries and financial markets, and their relationship to the flow of funds to- and from households, governments, business firms, and foreigners, as well as the financial infrastructure.
  • What is a financial infrastructure?
    It is a set of institutions that enables effective operation of financial intermediars and finanacial markets, including such elements as payment, credit information bureaus, and collateral registries
  • Explain what direct finance is?
    sectors who are in need of funds borrow from an another sector via a financial market
  • What is a financial market?
    It is a market where participants issue and trade securities
  • Explain how asymmetry information arises ex-ante?
    It arises in a ex-ante because borrowers generally know more about their investment project than lenders. Borrowers most eager to engage in a transaction are the most likely ones to produce an undesirable outcome for lender (adverse selection.

    solution:intermediaries reduce information costs and improve resource allocation
  • What are the two main functions of the financial system?
    1. Reducing information- and transactioncosts
    2. Facilitating the trading diversification, and management risk, to explain why the financial sector may stimulate capital formation and/or technological innovation, two of the driving forces of economic growth
  • In what does a financial system help?
    By overcoming an information asymmetry between borrowers and lenders
  • What are the causes of high informations costs?
    They keep the funds from flowing to their  highest productive use.
  • Explain the four roles of the government in the FS
    1) protect property - contracts need to be enforced 
    2) transparency - info provision can reduce adverse selection & trans. costs
    3) soundness - regulation & supervision. Intermediaries take too many risks due to higher possible revenues: too costly for lenders to choose an institution
    4) competition policy - to avoid fixed prices and unfair state aid
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