Read the summary and the most important questions on Financial Markets and Institutions A European Perspective | 9781107025943 | Jakob de Haan; Sander Oosterloo; Dirk Schoenmaker

• 1 Functions of Financial System

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• 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