Summary
Samenvatting banking
- Course
- Institution
- Book
This is a summary of all the lessons and the book of banking in English. The lessons are taught in the master TEW by Kurt Verstegen.
[Show more]
Connected book
Book Title:
Author(s):
- Edition:
- ISBN:
- Edition:
More summaries for
-
Banking
2 reviews
By: robbevaneechaute • 2 weeks ago
By: Piepen • 9 months ago
Seller
Follow
TEWaanUA
Reviews received
Content preview
BankingUnderstanding problems is the most important, memorizing is less important (book)
Aim exam: how well do you understand the course, he is not asking the 7 functions of financial
markets for example, but he does ask examples of stuff, not memorizing everything, he can give an
example and you need to understand the concepts
Chapter 1: Introduction to financial markets and banking (not really important)
1.1 Some introductory concepts
o Money market vs capital market
• Money market: short term (< 1y)
• Capital market: medium and long term (stocks and bonds)
o Primary market vs secondary market
• Primary market: where securities are issued (ex. IPO)
• Secondary market: where securities are traded
o Bond market vs stock market
• Bond market: fixed income + creditor
• Stock market: income not fixed + owner
o Derivative markets
• Cf options, futures, forwards…
o Official exchange or over the counter
1.2 Functions of financial markets
o Why do financial markets exist?
“The primary role of the capital market is the allocation of ownership of the economy’s capital stock.
In general terms, ideal is a market in which prices provide accurate signals for resource allocation.
That is, a market in which firms can make production-investment decisions, and investors can choose
among the securities that represent ownership of firms’ activities under the assumption that
securities prices at any time “fully reflect” all available information” - Eugene Fama
o Notes:
• Capital market is there to make sure money goes to the right place: allocating the
ownership of capital
• By knowing the price of capital it helps you allocating where your money should go
• Assumption: refers to efficient market hypothesis
o The seven main functions of financial markets:
• Function 1: transfer funds
- Financial markets make it easier to transfer funds required for consumption
or investments
- The transfer of money from sectors with surpluses to sectors with deficits
• Function 2: accumulation
- Financial markets allow people to build up wealth
• Function 3: risk-sharing
- Financial markets transfer risk to parties interested in taking risk
1
, • Function 4: liquidity
- Financial markets allow people to sell financial assets: ideally on the short
term and without loss of value (i.e. liquid markets)
• Function 5: pricing
- Financial markets provide information about the price of financial assets
• Function 6: aggregation of information
- Financial markets aggregate information of many parties
- Trading means many people can offer a price for it so a lot of people’s
information is in the price of the stock, might give better price result
• Function 7: efficiency
- Financial markets reduce transaction and information costs
o Financial markets are promises
• Bonds
- Promises a (coupon) payment on fixed times
• Stocks
- Promises a share of future profits
• Pension fund
- Promises an income stream when people retire
• Life insurance
- Promises to pay out after a certain period of time, or in case of death
• Mutual fund
- Promises to distribute profits gained by investing in bonds and stocks
1.3 Size of financial markets
1.4 Asymmetric information
o Asymmetric information: the one making a promise (i.e. selling financial assets) knows more
about the future than the one buying the promise
o This leads to:
• Adverse selection
• Moral hazard
2
, o Adverse selection
• Agents on one side of the transaction have more information than agents at the
other side
• Is a problem of asymmetric information before the transaction occurs
• Can lead to the market unraveling
• Ex: secondhand cars, CDO’s
- Secondhand cars: you’re trying to sell your car, you know what your car is
worth but the buyer doesn’t so he will pay you an average price; if you have
a good car you get less than you deserve and if you have a bad car you get
more than you deserve so in the end people with good cars will leave the
market and only the bad cars stay
- CDO = Collateralized Debt Obligations: collections of mortgages
o Moral hazard
• = The risk that one initiates uncareful or risky activities because he or she is insured
against losses
• By (hidden) actions of the contractors, the risk of the transaction changes
• People who are initially planning on keeping their promises might receive an
incentive to break them
• Is a problem of asymmetric information after the transaction occurs
• Ex: car insurance, deposit insurance
- Let’s say you drive a car without insurance so you will be careful; but when
having an omnium insurance, you might drive more risky because you know
if something happens you can get money back
o Solutions?
• Gathering more information, but…
• Costly to the one gathering the information
• If multiple people want the same information, we have inefficient duplication
• Free-rider problem: when the information becomes public
• Rational ignorance: when uninformed parties follow others because they think they
are better informed, herding occurs (bubbles, inefficient allocation, …)
o Collateral, but…
• Only if you have something, you can give something as collateral
• Assumes a correct legal system
• Not always high-quality collateral available?
1.5 Allocation of funds
o Three types of financing
• Direct financing
• Semi-direct financing
• Indirect financing
Direct financing
o Surplus sectors = sectors with too much money
o Deficit sectors = sectors with not enough money
3
, o Direct financing means households’ savings go directly to bonds or stocks issued by firms
• In an economy with only direct financing, there is a risk of a low level of financing,
because of several problems
o Problems
• High transaction and information costs
- Costly (time intensive, make sure it’s good info… ) to find out in which
project to invest, or find out more about project (avoiding adverse selection)
- Monitoring: make sure that funds invested are used as promised, make sure
things are going well after you invested (avoiding moral hazard)
• Maturity
- Often long term investment
- Not all investors are looking to invest in the long term (i.e., maturity
transformation)
• Amount
- Investments often require large amounts, leads to diversification problem for
the investor
o Conclusion
• Using direct financing, investments are usually confined to friends, family and fools
• Every investor has to do his homework (which is inefficient)
Semi-direct financing
o Important difference: financial intermediary = for ex. stockbroker ≠ bank
• Same assets and same money moving (no transformation)
o Using semi-direct financing, an intermediary or “broker” is used to invest directly into
o financial assets
o Broker (Longman online dictionary)
• = “Someone who buys and sells things such as shares in companies or foreign money
for other people”
• = “Someone who arranges sales or business agreements for other people”
o Advantages:
• Supply of information
- Broker has a big collection of data because of all the investors on the stock
market, so broker has more information than individual
• Setting a price
• Making markets more liquid
• Secondary markets
o Disadvantages:
• High costs for small amounts
• Asymmetric information
4
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller TEWaanUA. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $5.95. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
80796 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now