Chap001金融机构习题解答.docx
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Chap001金融机构习题解答.docx
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Chap001金融机构习题解答
ChapterOne
WhyAreFinancialIntermediariesSpecial?
ChapterOutline
Introduction
FinancialIntermediaries’Specialness
∙InformationCosts
∙LiquidityandPriceRisk
∙OtherSpecialServices
OtherAspectsofSpecialness
∙TheTransmissionofMonetaryPolicy
∙CreditAllocation
∙IntergenerationalWealthTransfersorTimeIntermediation
∙PaymentServices
∙DenominationIntermediation
SpecialnessandRegulation
∙SafetyandSoundnessRegulation
∙MonetaryPolicyRegulation
∙CreditAllocationRegulation
∙ConsumerProtectionRegulation
∙InvestorProtectionRegulation
∙EntryRegulation
TheChangingDynamicsofSpecialness
∙TrendsintheUnitedStates
∙FutureTrends
∙GlobalIssues
Summary
SolutionsforEnd-of-ChapterQuestionsandProblems:
ChapterOne
1.Identifyandbrieflyexplainthefiveriskscommontofinancialinstitutions.
Defaultorcreditriskofassets,interestrateriskcausedbymaturitymismatchesbetweenassetsandliabilities,liabilitywithdrawalorliquidityrisk,underwritingrisk,andoperatingcostrisks.
2.Explainhoweconomictransactionsbetweenhouseholdsaversoffundsandcorporateusersoffundswouldoccurinaworldwithoutfinancialintermediaries(FIs).
InaworldwithoutFIstheusersofcorporatefundsintheeconomywouldhavetoapproachdirectlythehouseholdsaversoffundsinordertosatisfytheirborrowingneeds.Thisprocesswouldbeextremelycostlybecauseoftheup-frontinformationcostsfacedbypotentiallenders.Costinefficiencieswouldarisewiththeidentificationofpotentialborrowers,thepoolingofsmallsavingsintoloansofsufficientsizetofinancecorporateactivities,andtheassessmentofriskandinvestmentopportunities.Moreover,lenderswouldhavetomonitortheactivitiesofborrowersovereachloan'slifespan.Thenetresultwouldbeanimperfectallocationofresourcesinaneconomy.
3.Identifyandexplainthreeeconomicdisincentivesthatprobablywoulddampentheflowoffundsbetweenhouseholdsaversoffundsandcorporateusersoffundsinaneconomicworldwithoutfinancialintermediaries.
Investorsgenerallyareaversetopurchasingsecuritiesdirectlybecauseof(a)monitoringcosts,(b)liquiditycosts,and(c)pricerisk.Monitoringtheactivitiesofborrowersrequiresextensivetime,expense,andexpertise.Asaresult,householdswouldprefertoleavethisactivitytoothers,andbydefinition,theresultinglackofmonitoringwouldincreasetheriskinessofinvestingincorporatedebtandequitymarkets.Thelong-termnatureofcorporateequityanddebtwouldlikelyeliminateatleastaportionofthosehouseholdswillingtolendmoney,asthepreferenceofmanyfornear-cashliquiditywoulddominatetheextrareturnswhichmaybeavailable.Third,thepriceriskoftransactionsonthesecondarymarketswouldincreasewithouttheinformationflowsandservicesgeneratedbyhighvolume.
4.IdentifyandexplainthetwofunctionsinwhichFIsmayspecializethatenablethesmoothflowoffundsfromhouseholdsaverstocorporateusers.
FIsserveasconduitsbetweenusersandsaversoffundsbyprovidingabrokeragefunctionandbyengagingintheassettransformationfunction.Thebrokeragefunctioncanbenefitbothsaversandusersoffundsandcanvaryaccordingtothefirm.FIsmayprovideonlytransactionservices,suchasdiscountbrokerages,ortheyalsomayofferadvisoryserviceswhichhelpreduceinformationcosts,suchasfull-linefirmslikeMerrillLynch.Theassettransformationfunctionisaccomplishedbyissuingtheirownsecurities,suchasdepositsandinsurancepoliciesthataremoreattractivetohouseholdsavers,andusingtheproceedstopurchasetheprimarysecuritiesofcorporations.Thus,FIstakeonthecostsassociatedwiththepurchaseofsecurities.
5.InwhatsensearethefinancialclaimsofFIsconsideredsecondarysecurities,whilethefinancialclaimsofcommercialcorporationsareconsideredprimarysecurities?
Howdoesthetransformationprocess,orintermediation,reducetherisk,oreconomicdisincentives,tothesavers?
Thefundsraisedbythefinancialclaimsissuedbycommercialcorporationsareusedtoinvestinrealassets.Thesefinancialclaims,whichareconsideredprimarysecurities,arepurchasedbyFIswhosefinancialclaimsthereforeareconsideredsecondarysecurities.SaverswhoinvestinthefinancialclaimsofFIsareindirectlyinvestingintheprimarysecuritiesofcommercialcorporations.However,theinformationgatheringandevaluationexpenses,monitoringexpenses,liquiditycosts,andpriceriskofplacingtheinvestmentsdirectlywiththecommercialcorporationarereducedbecauseoftheefficienciesoftheFI.
6.Explainhowfinancialinstitutionsactasdelegatedmonitors.Whatsecondarybenefitsoftenaccruetotheentirefinancialsystembecauseofthismonitoringprocess?
Byputtingexcessfundsintofinancialinstitutions,individualinvestorsgivetotheFIstheresponsibilityofdecidingwhoshouldreceivethemoneyandofensuringthatthemoneyisutilizedproperlybytheborrower.InthissensethedepositorshavedelegatedtheFItoactasamonitorontheirbehalf.TheFIcancollectinformationmoreefficientlythanindividualinvestors.Further,theFIcanutilizethisinformationtocreatenewproducts,suchascommercialloans,thatcontinuallyupdatetheinformationpool.Thismorefrequentmonitoringprocesssendsimportantinformationalsignalstootherparticipantsinthemarket,aprocessthatreducesinformationimperfectionandasymmetrybetweentheultimatesourcesandusersoffundsintheeconomy.
7.WhatarefivegeneralareasofFIspecialnessthatarecausedbyprovidingvariousservicestosectorsoftheeconomy?
First,FIscollectandprocessinformationmoreefficientlythanindividualsavers.Second,FIsprovidesecondaryclaimstohouseholdsaverswhichoftenhavebetterliquiditycharacteristicsthanprimarysecuritiessuchasequitiesandbonds.Third,bydiversifyingtheassetbaseFIsprovidesecondarysecuritieswithlowerprice-riskconditionsthanprimarysecurities.Fourth,FIsprovideeconomiesofscaleintransactioncostsbecauseassetsarepurchasedinlargeramounts.Finally,FIsprovidematurityintermediationtotheeconomywhichallowstheintroductionofadditionaltypesofinvestmentcontracts,suchasmortgageloans,thatarefinancedwithshort-termdeposits.
8.HowdoFIssolvetheinformationandrelatedagencycostswhenhouseholdsaversinvestdirectlyinsecuritiesissuedbycorporations?
Whatareagencycosts?
Agencycostsoccurwhenownersormanagerstakeactionsthatarenotinthebestinterestsoftheequityinvestororlender.Thesecoststypicallyresultfromthefailuretoadequatelymonitortheactivitiesoftheborrower.Ifnootherlenderperformsthesetasks,thelenderissubjecttoagencycostsasthefirmmaynotsatisfythecovenantsinthelendingagreement.BecausetheFIinveststhefundsofmanysmallsavers,theFIhasagreaterincentivetocollectinformationandmonitortheactivitiesoftheborrower.
9.Whatoftenisthebenefittothelenders,borrowers,andfinancialmarketsingeneralofthesolutiontotheinformationproblemprovidedbythelargefinancialinstitutions?
Onebenefittothesolutionprocessisthedevelopmentofnewsecondarysecuritiesthatallowevenfurtherimprovementsinthemonitoringprocess.Anexampleisthebankloanthatisrenewedmorequicklythanlong-termdebt.Therenewalprocessupdatesthefinancialandoperatinginformationofthefirmmorefrequently,therebyreducingtheneedforrestrictivebondcovenantsthatmaybedifficultandcostlytoimplement.
10.HowdoFIsalleviatetheproblemofliquidityriskfacedbyinvestorswhowishtoinvestinthesecuritiesofcorporations?
Liquidityriskoccurswhensaversarenotabletoselltheirsecuritiesondemand.Commercialbanks,forexample,offerdepositsthatcanbewithdrawnatanytime.Yetthebanksmakelong-termloansorinvestinilliquidassetsbecausetheyareabletodiversifytheirportfoliosandbettermonitortheperformanceoffirmsthathaveborrowedorissuedsecurities.Thusindividualinvestorsareabletorealizethebenefitsofinvestinginprimaryassetswithoutacceptingtheliquidityriskofdirectinvestment.
11.Howdofinancialinstitutionshelpindividualsaversdiversifytheirportfoliorisks?
Whichtypeoffinancialinstitutionisbestabletoachievethisgoal?
Moneyplacedinanyfinancialinstitutionwillresultinaclaimonamorediversifiedportfolio.Bankslendmoneytomanydifferenttypesofcorporate,consumer,andgovernmentcustomers,andinsurancecompanieshaveinvestmentsinmanydifferenttypesofassets.Investmentinamutualfundmaygeneratethegreatestdiversificationbenefitbecauseofthefund’sinvestmentinawidearrayofstocksandfixedincomesecurities.
12.Howcanfinancialinstitutionsinvestinhigh-riskassetswithfundingprovidedbylow-riskliabilitiesfromsavers?
Diversificationofriskoccurswithinvestmentsinassetsthatarenotperfectlypositivelycorrelated.OneresultofextensivediversificationisthattheaverageriskoftheassetbaseofanFIwillbelessthantheaverageriskoftheindividualassetsinwhichithasinvested.Thusindividualinvestorsrealizesomeofthereturnsofhigh-riskassetswithoutacceptingthecorrespondingriskcharacteristics.
13.Howcanindividualsaversusefinancialinstitutionstoreducethetransactioncostsofinvestinginfinancialassets?
Bypoolingtheassetsofmanysmallinvestors,FIscangaineconomiesofscaleintransactioncosts.ThisbenefitoccurswhethertheFIislendingtoacorporateorretailcustomer,orpurchasingassetsinthemoneyandcapitalmarkets.Ineithercas
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