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

1、December 10th , 2010 Word count: 3300ContentIntroduction 3The definition of financial intermediaries 31. Collecting Savings 32 .Making Peoples Life Convenience 43. Offering Liquidity for Users 54. Reducing Risk 55. Decreasing the Scene of Asymmetry Information 6The negative side of financial interme

2、diaries: 71. Financial intermediaries are the pushers of financial bubble 72. Financial intermediaries is a transmission of financial risk 93. The inefficiency in financial intermediaries 104. Moral hazard in financial intermediaries 12Conclusion 14Reference 15Introduction The financial intermediari

3、es are part that cannot be ignored in financial market. However, it needs regulation to make sure it functions in the right way. The following parts will first define the financial intermediaries, and then analyse the function of financial intermediaries. After that, it will discuss that the financi

4、al intermediaries will probably be the pushers the financial bubble and lead to the economic crash by analysing the American Crisis in 2007. Whats more, by investigate the Asia Crisis in 1997, we find that without regulation it will be limited by inefficiency and moral hazard. So, we get a conclusio

5、n that financial should be regulated.The definition of financial intermediariesThe financial intermediary was defined by Siklos as “a financial institution that connects surplus and deficit agents. The classic example of a financial intermediary is a bank that transforms bank deposits into bank loan

6、s.”（Siklos,2001:p.35） The existence of financial intermediary enhances the financial growth. It also benefits thousands people or companies. After years of developing, financial intermediaries have rooted in finance field for its important functions.The functions of financial intermediaries are basi

7、cally: collecting savings and lending it out; convenience peoples daily life; offering liquidity; reducing risk; decreasing the scene of asymmetry information. 1. Collecting Savings It is common to see that banks collect money from thousands of individual, household or companies everyday and lend it

8、 to those who need them.In order to this, financial intermediary should gain peoples trust. With the government regulation, and their prestige and a reasonable sum of money stored, financial intermediary succeed in gain large sum of customers. Besides, the regulations are very important in regulatin

9、g financial intermediaries. We will discuss this in the example. 2 .Making Peoples Life ConvenienceImagine that when you get up in the morning, all the financial intermediaries disappeared. You have no safe place to keep your extra money. There is no automatic machine to get money directly. You shou

10、ld keep record of your money spend. This kind of life is a disaster for us. So, with the appearance of financial intermediaries, people can keep their money safe, get money easily form automatic machine, and get service on money flow. Every day, people go to banks and put the extra money into their

11、account. Banks and other financial intermediaries provide this service for us. And people believe banks or those other financial intermediary can promise the money safe.Besides keeping money safe, financial intermediaries also provide facilities that easy the daily transaction. When we are shopping,

12、 we can pay by visa cards, getting money out from ATM, or check. The financial intermediaries have already built a net system and made a deal for connecting the business and the bank accounts.Apart from keeping money safe, and paying things easily, financial intermediaries also make a record for our

13、 money flow. Still, take bank as an example. When we opened an account in the bank, bank would keep a record on all the transaction we did. We pay for clothes when we are shopping. We get paid by working. We pay for travel, arrange fees for higher studies, or bought CDs. When we get old, we bought u

14、s insurance. A persons life has large part of transaction to make him live better in this world with the banks recording all these things regularly.However, in order to do all those services, the formal regulations are very important for financial intermediaries.3. Offering Liquidity for UsersStephe

15、n said “Liquidity is a measure of the ease with which an asset can be turned into a means of payment, namely money.”（p21） The financial intermediaries succeed in providing this service for us. When you want some cash in emergency, you can easily get them from ATMs or banks with a little cost. Take g

16、overnment bonds as an example. You need cash for an emergency, however, all your holdings are 10,000 bonds and you cannot use these bonds for the emergency. In such a case, the financial intermediaries like broker or even banks will help individual to change the bonds to cash with a small cost. This

17、 is a small case to illustrate the important of liquidity. In everydays financial markets, there are many individuals, companies or government need the exchange the financial assets into cash and some others want to use cash to buy those financial assets, like bonds, stocks. So, with the running of

18、those financial intermediaries, all entities or individuals in the financial market get what they want in a fast and easy way. However, in order to make sure those financial intermediaries do these services in a right way, we need some regulations to regulate them.4. Reducing Risk Everyone knows tha

19、t it is unsafe to put all the eggs into one basket. It is risky. Like our money, if we put all our saving buying one kind of stock. What if the company will face a crisis in the new future? That means all your savings will disappear, and you will have nothing. The word diversify gives us good sugges

20、tion: leave yourself more choices instead of one. However, it is hardly for one to find solutions to deduce this risk. In such a situation, the financial intermediaries take the responsibility. Those companies will give the individuals some good choices to invest in several kinds of stocks. The bank

21、s also fully use diversifying to reduce the risk. They lend the deposit to those who need them, but they put a small sum of one persons deposit for the loan. To make sure that those financial intermediaries run in the right way, there should be the regulations.5. Decreasing the Scene of Asymmetry In

22、formationThe relationship of borrowers and lenders are always not fair. The lenders are not sure of borrowers credit. It takes time and money for borrowers to get this information. The financial intermediaries gather and sort out the useful information for lenders. They are large, powerful companies

23、. They can investigate the borrowers and make sure the borrowers they selected worth trust. From the above statement, we can see these financial institutions benefit us a lot. They collect the scattered funds in the market, and then invest in other businesses. The intermediaries help to transfer the

24、 money from the creditors to the debtors and make the process more easily. They timely provide variety of information to the public so that they, to some extent, make up the defect caused by the information asymmetry. And the ordinary could make more suitable decisions according to these pieces of n

25、ews. Although the intermediary has many advantages, it has several drawbacks. Due to the professional technical and complexity, the majority of investors （the buyer） do not have to acquire, analyze the ability of obtaining financial market information. On the contrary, the financial institutions hav

26、e more professional talents. However, with the constant evolution of financial intermediary, this advantage has a risk of being abused. That means it exists moral hazard problem. The institutions may deliberately hide some significant information which may affect decision-making. For example, since

27、Shuanghui inc （ a Chinese food company） hold by Goldman Sachs on 2004, it has gotten more than 60% dividends for four years. And the Goldman Sachs earned 240% profit in a period of three years. From then on the Goldman Sachs reduced the shares sharply. But the Shuanghui have not released the clarifi

28、cation announcement until December 200. It is generally accepted that the final purpose of the financial intermediary is to maximize profits. And for the purpose of gaining money, the agency may make undue policies. At the result it would cause bubble economy. Take financial crisis on 2008 as an exa

29、mple, the reasons contain zero mortgage and excessive easy credit policy. To sum up, we must regulate the financial intermediary to avoid these risks. And the authorities in deed develop a lot of measures. Firstly, the government built a sophisticated regulatory authority system. For instance, China

30、 has Central Bank, China Banking Regulatory Commission and China Securities Regulatory Commission. These agencies help to guard against and defuse risks and maintain financial stability. Also some arrangements have taken action. The most common approach is the mandatory disclosure of the related tra

31、nsactions information of the financial intermediaries. There are numerous laws about it. Still this is not enough.In consideration of the undeveloped financial system, the financial intermediaries should be regulated seriously. If we do not do this, the consequence may be bad. Many economic crises h

32、appened because of negligence of regulate.1. Financial intermediaries are the pushers of financial bubbleFinancial bubble sometimes is related to price bubble, market bubble or speculative bubble. It occurs when speculators purchase a financial asset at a price above its fundamental value in the expectation of a subsequent capital gain （Radelet, S）.