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Bună Ziua!
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Financial Institutions and Markets
Professor Lal C. Chugh
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Financial Institutions and Markets
Economic Units
Households
Business Firms
Governments [ local, state, central]
Foreign Sector
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Financial Institutions and Markets
Deficit Spending Units (DSU )
Expenditures exceed Receipts; Cash
outflow is greater than cash inflow, hence need for funds.
Surplus Spending Units (SSU)
Cash inflow exceeds cash outflow Name DSU’s and SSU’s
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Transfer Of Funds from Surplus to Deficit Spending Units
Surplus Spending Units
HouseholdsBusiness FirmsGovernments
Foreign Sector
Funds Financial Markets
Funds
Fu
nd
s
Financial Intermediaries
Deficit Spending Units
HouseholdsBusiness FirmsGovernments
Foreign Sector
Indirect Financing
Direct Financing
Fund
sFundsFunds
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Financial Institutions and Markets
Direct Financing:
Loan from friends & families (Angels), Venture Capital; SSU’s buy stocks and bonds of new companies in the markets
Indirect Finance:
SSU’s deposit funds in FI’s and DSU’s get funds from FI’s
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Financial Institutions and Markets
Financial Intermediaries: 1. Deposit Type Banks, Cooperative Credit Institutions, Savings Institutions for Housing, Mortgage Banks 2. Contractual Type Life Insurance, Casualty Insurance, Pension Funds
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Financial Institutions and Markets
Financial Intermediaries continued:
3. Mutual Funds—Investment Companies
Stock Funds, Bond Funds, Money
Market Funds; “Net Asset Value”, Calculation of
NAV ; Open-ended ; Closed ended
4. Non Bank Financial Institutions
Consumer and Business Loans
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Financial Institutions and Markets
All these FI’s have different types of assets and liabilities. For Example:
1. Banks have short term liabilities and
relatively short term assets
2. Life Insurance companies have long
term liabilities and long term assets
3. Investment Funds—according to goals
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Financial Institutions and Markets
Role of FI’s---Indirect Finance 1. Denomination Intermediation Savers save in small amounts, Borrowers borrow in large amounts 2. Maturity Intermediation--liquidity SSU’s want short term assets, DSU’s want funds for a longer time
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Financial Institutions and Markets
Role of FI’s—Indirect Finance: 3. Search Costs for DSU’s and SSU’s reduced 4. Diversification of Risk Banks reduce credit risk Mutual Funds reduce price risk Insurance companies reduce risk by pooling
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Financial Institutions and Markets
Role of FI’s—Indirect Finance: 5. Currency Exchange Facilitate international trade and investments 6. Advice on risk reduction strategies
7. Providing guarantees to reduce cost of financing
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Financial Institutions and Markets
Financial Markets:
Stock Market
1.Existing stocks are traded— “Secondary”
Market
2. New Shares of old firms, or shares of
New Firms-- Initial Public Offering (IPO’s);
Role of Investment Bankers
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Financial Institutions and Markets
Financial Markets:
Bond Markets
Bond is an instrument of loan to
firm/government. It has a coupon and a
face value. Bonds are traded.
Foreign Exchange Market
Currencies are traded
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Financial Institutions and Markets
Face Value1000 $
BOND
Coupon 10% semi-annual
50$ each half year is paid by borrower
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Financial Marketsin Romania
Bucharest Stock Exchange (BSE)
Trading of stocks ---Joint Stock Companies; Some IPO’s Also Futures on Stock Index Also Bond Trading “BET” index of 10 companies; BET-C Index for all companies; Also Futures on shares and currency
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Financial Markets in Romania
Sibiu Monetary, Financial and Commodities Exchange “BMFMS” “SIBEX” Trading in Futures/Options What is “Futures”? What is “Option”? Currency, Commodities, Shares and Indexes Both are regulated by the Securities
Commission (CNVM)
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Financial Markets
Municipality can issue bonds backed by its revenues—several have issued and are listed on BSE. Municipal Bonds
Mortgage Bonds—backed by the mortgages
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Financial Institutions in Romania
Financial Sector has been expanding since 2004
Ratio of FI’s assets/GDP in 2004=44%; Now over 75%
Banks are the most important in terms of assets. Non bank FI’s and Insurance Firms;
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Financial Institutions in Romania
Foreign Investment into the financial sector Private Capital in Banks; Govt. Capital—only
a few (2). Foreign Banks –Greece, Netherland and
Austria---have a substantial ownership in the banking industry
Foreign Short term Deposits in foreign currency in the Romanian banking industry
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Financial Institutions in Romania
Impact of Global Crisis ? If Foreign Banks reduce support to banking
sector, What are the consequences?1. Banks may not be able to make loans to
companies and households. The economy suffers--Bad Debts increase.
2. Banks may not have sufficient equity to meet standards and maintain solvency
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Financial Institutions in Romania
But: Vienna Initiative—Parent Banks (9) have
made a commitment to continue to support Romanian banks and branches.
IMF/EU loan provides a cushion. Conditions: Fiscal Austerity—Reduce Deficit—Pension
Reform, Cuts in Govt. Personnel, Cuts in Wages
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Financial Institutions in Romania
Progress is being made in that area. Banks are in a stronger position Solvency Ratio; Deposit Insurance; Stress Tests Romanian Economy is expected to grow faster [1.3%
in 2010 instead of 0.3%] Both IMF and EU have made favorable reviews.
Funds have been released. Vigilance on the deficit “Deficit Target” likely to be
met
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Thank You
Mulţumesc!