Lec1+2+3 introductionfundamentals of FIs

FINANCING  ORGANIZATIONS MSC  NGO  THI  HANG Course  outline Lecture Topic Readings Introduction Chapter  1  +  2 Fundamentals of Financial institutions Chapter  7  +  8  +  5  +  6   Central bank and Monetary policy Chapter  9  +  10  +  8  +  9 Commercial Banks Chapter  17 10  +  11 Financial regulation Chapter  18  +  3 12 Mid-­‐term exam 13  +  14  +15 Mutual Fund, Hedge Fund and ETF Chapter  20 16  +  17 Insurance Companies and Pension Funds Chapter  21 18  +  19 Investment banks and Venture Capital firms Chapter  22 20  +  21 Group presentation 22 Course Review Materials • Lecture  PPT  slides • Text  book:  Financial  Markets  and  Institutions  (8th Edition) – Frederic  S  Mishkin,  Stanley  G  Eakins  Pearson,  2015   • Readings: will  be  provided  before  each  lecture Advisors: MSc    Ngo  Thi  Hang Email:  ngohang@hvnh.edu.vn Assessment • Participation:  10% • Mid-­‐term  test:  20% • Group  assignment:  15% • Presentation:  15% • Final  exam:  40% Lecture  1+2+3 Introduction  and  fundamentals   of  Financial  institutions MSC  TUAN  LE  (THOMAS) Main  content Why  study  financial  institutions? Overview  of  financial  institutions 2.1  Overview  of  Financial  system 2.2  The  importance  of  FIs 2.3  Types  of  FI 2.4  Regulation  of  the  Financial  system Why  do  financial  crises  occur? PART  1 WHY  STUDY  FINANCIAL   INSTITUTIONS? What  is  Financial  Institutions? a  financial  institution is  an  institution  that  provides   financial  services  for  its  clients  or  members   • One  of  the  most  important  financial  services  provided  by  a   financial  institution  is  channeling  of  funds in  the  economy • The  financial  institution  acts  as  a  financial  intermediary Why  study  Financial  Institutions? • Financial  institutions  make  financial  system  work   • Without  FIs,  funds  could  not  be  transferred  from  those  with   savings  (fund  providers/savers)  to  those  who  have  investment   projects  and  are  in  need  (fund  users/spenders)   à They  thus  play  a  crucial  role  in  improving  the  efficiency  of   the  economy vs Why  study  Financial  Institutions? • FIs  are  among  the  largest  employers   in  the  world  and  frequently  pay  very   high  salaries   • Knowing  how  financial  institutions  are  managed  may  help  you  get  a   better  deal  when  you  need  to  borrow  from  them  or  if  you  decide  to   supply  them  with  funds 10 Moral  Hazard • Agency  problem  (debt  market): Suppose   you  lend  Mr  Thomas  $9,000   (with  10%  interest  rate)  to  set   up  his  business  of  an  ice-­cream  shop  in  banking  academy Instead   of  concentrating   on  the  main  business,  Thomas  use  it  on  an   innovation   of  ice-­cream  that  never  melt  (riskier  project) You  may  decide  not  to  make  the  loan ØIf  Thomas  succeeds:  You  only  get  10%,  Thomas  gets  a  lot  more ØIf  Thomas  fails:  You  loss  $9,000 36 Tools  to  solve  Moral  Hazard  (Debt) 37 Asymmetric  information 38 Asymmetric  information • How  do  FIs  help  reduce  asymmetric  information? ØExpertise  in  screening  out  bad  credit  risks  from   good  ones  (reduce  loss  from  adverse  selection) ØExpertise  in  monitoring the  borrowers/fund  users   (reduce  loss  from  moral  hazard) 39 Types  of  FIs 40 Regulation  of  the  FIs • The  financial  system  is  among  the  most  heavily   regulated  sectors  of  the  American  economy • The  government  regulates  financial  markets  for  two   main  reasons:   • to  increase  the  information  available   to  investors,  and   • to  ensure  the  soundness  of  the  financial  system   41 PART  3 Why  do  Financial  crises   occur  ? What  is  Financial  crisis? A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system prevents the financial system from channeling funds efficiently from savers to households and firms with productive investment opportunities 43 Dynamics  of  Financial  Crises   in  Advanced  Economies Stage  1 • Initiation  of   Financial  Crisis Stage  2 • Banking  Crisis Stage  3 • Debt  deflation 44 45 Dynamics  of  Financial  Crises   in  Advanced  Economies • Typical  crises: • The  Great  Depression  1929  – 1933 • The  Global  Financial  Crisis  2007-­‐2009 46 Dynamics  of  Financial  Crises   in  Emerging  Economies Stage  1 • Initiation  of   Financial  Crisis Stage  2 • Currency  Crisis Stage  3 • Full-­‐Fledged   Financial  Crisis 47 Dynamics  of  Financial  Crises   in  Emerging  Economies • Typical  crises: • Financial  Crises  in  Mexico,  1994–1995; • East  Asia,  1997–1998;   • Argentina  2001–2002 49 Thank  you ... securities  in  the  Seasoned-­Equity  Offering   20 21 Function ? ?of ? ?FIs • List ? ?of  fact  to  be  explained   later: Stocks  are  not  the  most  important  source ? ?of  external  financing Marketable...  loss  from  moral  hazard) 39 Types ? ?of ? ?FIs 40 Regulation ? ?of  the ? ?FIs • The  financial  system  is  among  the  most  heavily   regulated  sectors ? ?of  the  American  economy • The  government...  decentralize  market  (no   physical  location) 17 Markets  and ? ?FIs  that  involve 18 Function ? ?of ? ?FIs:  Indirect  finance • The  process ? ?of  indirect  finance  using  financial   intermediaries,