Chap001金融机构习题解答.docx

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