Intro
ROLE OF FINANCIAL MARKETS & INSTITUTIONS
Dr. Clay M. Moffett
Cameron 220 – O
moffettc@uncw.edu
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Intro
Syllabus:
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Grading
Attendance
Homework
Read the chapters before class
Contacting moi….
Who’s who?
Chapter 1?
The US is a fully developed market economy
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An efficient banking system.
An active and liquid securities market.
A well defined insurance network.
A highly developed system for consumer and business financing
An increasing demand for financial specialists to analyze,
manage, and advise.
1. Primary markets - facilitate the issuance of new securities
2. Secondary markets facilitate - the trading of existing
securities, which allows for a change in the ownership of
the securities
a. Liquidity is the degree to which securities can easily be
liquidated (sold) without a loss of value. Marketability?
b. Marketability? If a security is illiquid, investors may not be
able to find a willing buyer for it in the secondary market and
may have to sell the security at a large discount just to
attract a buyer.
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Efficient Allocation of Resources
 Provide funds to most efficient investments
 Provide Capital Surplus to Capital Deficit units
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Risk Management & Risk Reduction
 Provide hedging instruments
 Diversify investments to reduce risk
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Efficient Transfer of Financial Claims
 Provide low cost liquidity services
 Facilitate efficient movement of capital
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Money Market Instruments
 Maximum 1 year maturities
 T-Bills, Commercial Paper, Bankers Acceptances
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Capital Market Instruments
 Long maturity debt securities (Bonds)
 Stocks
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Derivative Securities
 Options
 Futures
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Depository Institutions
 Banks, Credit Unions, Savings & Loan Associations
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Contractual Savings Institutions
 Insurance Companies, Pension Funds
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Investment Intermediaries
 Mutual Fund Companies, Finance Companies
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1.
Following the abrupt increase in home prices in the 20042006 period, many financial institutions increased their
holdings of mortgages and mortgage-backed securities.
2. In 2007-2008 period, mortgage defaults increased and
home values declined substantially.
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1.
Systemic Risk is the spread of financial problems, among
financial institutions and across financial markets, that could
cause a collapse in the financial system.
2. Mortgage defaults affected financial firms in several ways:
a. Mortgage originators sold mortgages to other financial
institutions shortly before the crisis.
b. Many other financial institutions invested in derivatives and
were exposed to the crisis.
c. Some financial institutions relied on short-term funding and
used MBS as collateral.
d. Decline in home building activity caused a decrease in the
demand for many related businesses leading to a weak
economy.
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1. Emergency Economic Stabilization Act
Intended to resolve the liquidity problems of financial
institutions and to restore the confidence of the investors
who invest in them.
2. Federal Reserve Actions - Fed provided emergency loans to
many securities firms that were not subject to its regulation.
3. Financial Reform Act of 2010
a. Also referred to as Wall Street Reform Act or Consumer
Protection Act
b. Mortgage lenders must verify the income, job status, and
credit history of mortgage applicants before approving
mortgage applications.
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Regulatory Divisions by the US Congress
 Security Markets
 Depository Institutions
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Objectives of Regulation
 Protect consumers/investors
 Insure a level playing field
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Rationale for Regulation/Deregulation
 Increase information flow
 Insure financial soundness
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1. Required Disclosure:
• The Securities Act of 1933 was intended to ensure
complete disclosure of relevant financial information on
publicly offered securities and to prevent fraudulent practices in
selling these securities.
• The Securities Exchange Act of 1934 extended the
disclosure requirements to secondary market issues.
2. Regulatory Response to Financial Reporting Scandals
The Sarbanes-Oxley Act required that firms provide more
complete and accurate financial information (cough,
cough)….
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Financial Services / Infrastructure
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 Follows international trade patterns and practices
 Stage of host market development key to service level
Foreign Investment (Capital shifts)
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Dependent upon availability of information
Restrictions on direct investment
Affected by the political climate
Ability to repatriate profits
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Focus on “Interpreting Financial News” for each chapter.
What is the difference between Surplus and Deficit units?
How do Primary markets differ from Secondary markets?
What is the difference between Money and Capital
markets?
What is Marketability and how does it differ from Liquidity
and why is it important?
How Depository and Non-Depository,
Commercial/Investment institutions differ in services
provided?
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