The Importance of Regulation in Financial IntermediariesWord文档下载推荐.docx

The Importance of Regulation in Financial IntermediariesWord文档下载推荐.docx

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December10th,2010

Wordcount:

3300

Content

Introduction3

Thedefinitionoffinancialintermediaries3

1.CollectingSavings3

2.MakingPeople’sLifeConvenience4

3.OfferingLiquidityforUsers5

4.ReducingRisk5

5.DecreasingtheSceneofAsymmetryInformation6

Thenegativesideoffinancialintermediaries:

7

1.Financialintermediariesarethepushersoffinancialbubble7

2.Financialintermediariesisatransmissionoffinancialrisk9

3.Theinefficiencyinfinancialintermediaries10

4.Moralhazardinfinancialintermediaries12

Conclusion14

Reference15

Introduction

Thefinancialintermediariesarepartthatcannotbeignoredinfinancialmarket.However,itneedsregulationtomakesureitfunctionsintherightway.Thefollowingpartswillfirstdefinethefinancialintermediaries,andthenanalysethefunctionoffinancialintermediaries.Afterthat,itwilldiscussthatthefinancialintermediarieswillprobablybethepushersthefinancialbubbleandleadtotheeconomiccrashbyanalysingtheAmericanCrisisin2007.What'

smore,byinvestigatetheAsiaCrisisin1997,wefindthatwithoutregulationitwillbelimitedbyinefficiencyandmoralhazard.So,wegetaconclusionthatfinancialshouldberegulated.

Thedefinitionoffinancialintermediaries

ThefinancialintermediarywasdefinedbySiklosas“afinancialinstitutionthatconnectssurplusanddeficitagents.Theclassicexampleofafinancialintermediaryisabankthattransformsbankdepositsintobankloans.”（Siklos,2001:

p.35）Theexistenceoffinancialintermediaryenhancesthefinancialgrowth.Italsobenefitsthousandspeopleorcompanies.Afteryearsofdeveloping,financialintermediarieshaverootedinfinancefieldforitsimportantfunctions.

Thefunctionsoffinancialintermediariesarebasically:

collectingsavingsandlendingitout;

conveniencepeople’sdailylife;

offeringliquidity;

reducingrisk;

decreasingthesceneofasymmetryinformation.

1.CollectingSavings

Itiscommontoseethatbankscollectmoneyfromthousandsofindividual,householdorcompanieseverydayandlendittothosewhoneedthem.

Inordertothis,financialintermediaryshouldgainpeople’strust.Withthegovernmentregulation,andtheirprestigeandareasonablesumofmoneystored,financialintermediarysucceedingainlargesumofcustomers.Besides,theregulationsareveryimportantinregulatingfinancialintermediaries.Wewilldiscussthisintheexample.

2.MakingPeople’sLifeConvenience

Imaginethatwhenyougetupinthemorning,allthefinancialintermediariesdisappeared.Youhavenosafeplacetokeepyourextramoney.Thereisnoautomaticmachinetogetmoneydirectly.Youshouldkeeprecordofyourmoneyspend.Thiskindoflifeisadisasterforus.So,withtheappearanceoffinancialintermediaries,peoplecankeeptheirmoneysafe,getmoneyeasilyformautomaticmachine,andgetserviceonmoneyflow.

Everyday,peoplegotobanksandputtheextramoneyintotheiraccount.Banksandotherfinancialintermediariesprovidethisserviceforus.Andpeoplebelievebanksorthoseotherfinancialintermediarycanpromisethemoneysafe.

Besideskeepingmoneysafe,financialintermediariesalsoprovidefacilitiesthateasythedailytransaction.Whenweareshopping,wecanpaybyvisacards,gettingmoneyoutfromATM,orcheck.Thefinancialintermediarieshavealreadybuiltanetsystemandmadeadealforconnectingthebusinessandthebankaccounts.

Apartfromkeepingmoneysafe,andpayingthingseasily,financialintermediariesalsomakearecordforourmoneyflow.Still,takebankasanexample.Whenweopenedanaccountinthebank,bankwouldkeeparecordonallthetransactionwedid.Wepayforclotheswhenweareshopping.Wegetpaidbyworking.Wepayfortravel,arrangefeesforhigherstudies,orboughtCDs.Whenwegetold,weboughtusinsurance.Aperson’slifehaslargepartoftransactiontomakehimlivebetterinthisworldwiththebanks’recordingallthesethingsregularly.

However,inordertodoallthoseservices,theformalregulationsareveryimportantforfinancialintermediaries.

3.OfferingLiquidityforUsers

Stephensaid“Liquidityisameasureoftheeasewithwhichanassetcanbeturnedintoameansofpayment,namelymoney.”（p21）Thefinancialintermediariessucceedinprovidingthisserviceforus.Whenyouwantsomecashinemergency,youcaneasilygetthemfromATMsorbankswithalittlecost.

Takegovernmentbondsasanexample.Youneedcashforanemergency,however,allyourholdingsare￡10,000bondsandyoucannotusethesebondsfortheemergency.Insuchacase,thefinancialintermediarieslikebrokerorevenbankswillhelpindividualtochangethebondstocashwithasmallcost.Thisisasmallcasetoillustratetheimportantofliquidity.Ineveryday’sfinancialmarkets,therearemanyindividuals,companiesorgovernmentneedtheexchangethefinancialassetsintocashandsomeotherswanttousecashtobuythosefinancialassets,likebonds,stocks.So,withtherunningofthosefinancialintermediaries,allentitiesorindividualsinthefinancialmarketgetwhattheywantinafastandeasyway.However,inordertomakesurethosefinancialintermediariesdotheseservicesinarightway,weneedsomeregulationstoregulatethem.

4.ReducingRisk

Everyoneknowsthatitisunsafetoputalltheeggsintoonebasket.Itisrisky.Likeourmoney,ifweputalloursavingbuyingonekindofstock.Whatifthecompanywillfaceacrisisinthenewfuture?

Thatmeansallyoursavingswilldisappear,andyouwillhavenothing.Theword‘diversify’givesusgoodsuggestion:

leaveyourselfmorechoicesinsteadofone.However,itishardlyforonetofindsolutionstodeducethisrisk.Insuchasituation,thefinancialintermediariestaketheresponsibility.Thosecompanieswillgivetheindividualssomegoodchoicestoinvestinseveralkindsofstocks.Thebanksalsofullyusediversifyingtoreducetherisk.Theylendthedeposittothosewhoneedthem,buttheyputasmallsumofoneperson’sdepositfortheloan.Tomakesurethatthosefinancialintermediariesrunintherightway,thereshouldbetheregulations.

5.DecreasingtheSceneofAsymmetryInformation

Therelationshipofborrowersandlendersarealwaysnotfair.Thelendersarenotsureofborrowers’credit.Ittakestimeandmoneyforborrowerstogetthisinformation.Thefinancialintermediariesgatherandsortouttheusefulinformationforlenders.Theyarelarge,powerfulcompanies.Theycaninvestigatetheborrowersandmakesuretheborrowerstheyselectedworthtrust.

Fromtheabovestatement,wecanseethesefinancialinstitutionsbenefitusalot.Theycollectthescatteredfundsinthemarket,andtheninvestinotherbusinesses.Theintermediarieshelptotransferthemoneyfromthecreditorstothedebtorsandmaketheprocessmoreeasily.Theytimelyprovidevarietyofinformationtothepublicsothatthey,‘tosomeextent,makeupthedefectcausedbytheinformationasymmetry’.Andtheordinarycouldmakemoresuitabledecisionsaccordingtothesepiecesofnews.Althoughtheintermediaryhasmanyadvantages,ithasseveraldrawbacks.Duetotheprofessionaltechnicalandcomplexity,themajorityofinvestors（thebuyer）donothavetoacquire,analyzetheabilityofobtainingfinancialmarketinformation.Onthecontrary,thefinancialinstitutionshavemoreprofessionaltalents.However,withtheconstantevolutionoffinancialintermediary,thisadvantagehasariskofbeingabused.Thatmeansitexistsmoralhazardproblem.Theinstitutionsmaydeliberatelyhidesomesignificantinformationwhichmayaffectdecision-making.Forexample,sinceShuanghuiinc（aChinesefoodcompany）holdbyGoldmanSachson2004,ithasgottenmorethan60%dividendsforfouryears.AndtheGoldmanSachsearned240%profitinaperiodofthreeyears.FromthenontheGoldmanSachsreducedthesharessharply.ButtheShuanghuihavenotreleasedtheclarificationannouncementuntilDecember200.Itisgenerallyacceptedthatthefinalpurposeofthefinancialintermediaryistomaximizeprofits.Andforthepurposeofgainingmoney,theagencymaymakeunduepolicies.Attheresultitwouldcausebubbleeconomy.Takefinancialcrisison2008asanexample,thereasonscontainzeromortgageandexcessiveeasycreditpolicy.Tosumup,wemustregulatethefinancialintermediarytoavoidtheserisks.Andtheauthoritiesindeeddevelopalotofmeasures.Firstly,thegovernmentbuiltasophisticatedregulatoryauthoritysystem.Forinstance,ChinahasCentralBank,ChinaBankingRegulatoryCommissionandChinaSecuritiesRegulatoryCommission.Theseagencieshelptoguardagainstanddefuserisksandmaintainfinancialstability.Alsosomearrangementshavetakenaction.Themostcommonapproachisthemandatorydisclosureoftherelatedtransactionsinformationofthefinancialintermediaries.Therearenumerouslawsaboutit.Stillthisisnotenough.

Inconsiderationoftheundevelopedfinancialsystem,thefinancialintermediariesshouldberegulatedseriously.Ifwedonotdothis,theconsequencemaybebad.Manyeconomiccriseshappenedbecauseofnegligenceofregulate.

1.Financialintermediariesarethepushersoffinancialbubble

Financialbubblesometimesisrelatedtopricebubble,marketbubbleorspeculativebubble.Itoccurswhenspeculatorspurchaseafinancialassetatapriceaboveitsfundamentalvalueintheexpectationofasubsequentcapitalgain（Radelet,S）.