资本市场和金融机构12.pptVIP

4. Economic functions of FIs A) Brokerage B) Asset/Risk transformation Benefits: Increased liquidity, Price risk reduction Decreased costs Information costs Transaction Costs ?Efficiency in the financial markets C) Other functions  A) Brokerage: Providing information and transaction services Examples Investment analysts, stock brokers Insurance brokers B) Asset/risk transformation The FI transforms a financial claim in a different financial claim with different risk characteristics Technically: The FI purchase financial claims -primary securities (issued by corporations) by selling financial claims -secondary claims (issued by FIs) BENEFITS: Liquidity and Price Risk Liquidity: The ease of converting an asset into cash. In capital markets liquidity can also refers to the ability to quickly trade large size orders at low cost Price risk: the risk that price of an asset will be lower than its purchase price. It is more attractive for investors to buy the financial claims of FIs (e.g., secondary securities) instead of investing directly in primary securities issued by non-FIs. Example: Investing in a well diversified portfolio vs. investing in an barely traded individual security. Thus, Investing in secondary securities ? ↑ Liquidity and ↓Price risk (↓cost, ↑returns) BENEFITS: Decreased information costs and transaction costs Information costs Costs associated in the gathering of information due to Information Asymmetry * Adverse Selection * Moral Hazard Adverse Selection: Occurs when the potential borrower who knows better his credit (bad) risk is the most likely to seek out a loan. Problem created by asymmetric information before the transaction occurs Moral Hazard: Occurs when the borrower might engage in activities that are undesirable from the lender’s point of view because they make it less likely that the loan will be paid back. Problem created by asymmetric info