Financial Intermediation Financial system channels fu

ECON  3210  Review     Topic  1  –  Financial  Intermediation     Financial  system  channels  funds  from  ultimate  lenders  to  ultimate  borrowers.   • Provides  payment  system   • Better  efficiency     • Better  time  purchasing   • Reduces/transfers/diversifies  risk  

Know  balance  sheets  of     1. Creation  of  financial  instrument   2. Payment  of  income   3. Transfer  to  another  investor   4. Redemption  of  debt     ‘Issue’  à  primary  market   ‘sale’  à  secondary  market     securities  à  standardized  and  issued  in  large  packets  of  identical   loan  à  unique  and  tailored  to  borrower     • Surplus  Spending  Unit  (SSU):  ultimate  provider  of  funds   • Deficet  Spending  Unit  (DSU):  ultimate  recipient  of  funds   • Intermediary  (in  the  middle)    

 

 

  Essentially  financial  intermediaries  take  large  sums  from  SSUs  and  lend  smaller   tailored  amounts  to  DSUs.  

Direct  vs  Indirect  Finance       Direct  Finance:  financial  instrument  created  by  DSU  is  held  directly  by  an  SSU  (e.g.   securities,  straight  from  company  to  investor)  

e.g.       Indirect  Finance:  intermediation   • SSUs  and  DSUs  have  no  liability/asset  with  each  other  –  may  not  know  each   other  existence   • Two  separate  financial  instruments  required