FIN 390 EXAM 1 MING TSANG UWL STUDY GUIDE
Role of Financial Institutions - Answers - 1. reduce information cost - information
producers
2. Delegated Monitor
3. Lower Agency costs
4. Helps reduce liquidity risk
5. Price risk - FI's Secondary claims have less price risk
6. Diversifying risks
Functions of Financial Institutions - Answers - Brokerage function - Agent for savers,
reduce information and transaction costs
Asset-Transformation - Finance purchase of primary securities by selling financial
claims to households and other investors - issue more attractive claims to households
Regulation of FI's - Answers - Goal: ensure soundness of the overall system
5 types
1. Safety and Soundness - protect against failure of FIs, diversification of assets, no
more than 5% to one borrower. Regulatory policy- protect ultimate sources and users of
savings - prevent discrimination in lending
2. Investor Protected Regulation - aimed at protecting investors who use investment
banks directly/indirectly - protects against insider trading, malfeasance, lack of
disclosure, etc
3. Entry Regulation - level of entry impediments affects profitability and value of charter.
entry is regulated
4. Credit Allocation Regulation - support socially important sectors as housing and
farming. Req. for min amounts of assets in specific sectors, as well as max rates and
interest
5. Monetary Policy Regulation - banks have role in transmitting monetary policy from fed
res to economy - expansionary/contraction policy
Monitoring cost - Answers - When managers must monitor funds and track where they
are going - fund suppliers basically want documentation of their funds. This lowers
agency cost.
Liquidity cost - Answers - Financial Institution provide secondary claims which has
superior liquidity attributes. They are able to offer lower prices and can be confident to
liquidate due to the high diversification.
Liquidity can be fixed with time.
Price Risk - Answers - Risk the sell price will be lower than purchase price
Secondary claims issued by FIs have less price risk
, Information Cost - Answers - Costs which stem from doing due diligence in research,
analysis, etc.,.
Agency Cost - Answers - Idea that owners/managers of firms receiving savers funds will
take actions contrary to the best interest of savers
Thus FIs lower agency cost
Diversification - Answers - Splitting up assets/wealth to distribute risk - minimizing
losses, maximizing returns within constaints
Transaction Cost - Answers - Theory that when costs in the market are high - internalize
these activities within firm
If transaction cost in market was lower than inside the firm - then buy/sell on the market
By grouping their assets to purchase assets in bulk (house hold savers) or (principals)
can see lower transaction cost
FI Function as Asset Transformer - Answers - Purchase securities issued by corps such
as equity bonds and debt all are primary securities and than sell financial claims to
household user called secondary securities
Issues Financial Claims that are more attractive to household save than claims directly
from corps called secondary securities
These result in lower costs.
FI function as a Broker - Answers - FI acts as a agent for the saver by providing
information and transaction service
When FI preform these transactions, it results in Economies of scale and increased
efficiency
Ex. Investment research
Reduce info cost Reduce transaction cost
Encourages higher rate of savings
Credit Allocation Regulation - Answers - supports socially important sectors such as
housing and farming
Chapter 2: Depository Institutions - Answers - Financial institutions that accept deposits
from individuals and provide loans. Activities on both sides of the balance sheet, assets
and liabilities
3 Types of DI
Role of Financial Institutions - Answers - 1. reduce information cost - information
producers
2. Delegated Monitor
3. Lower Agency costs
4. Helps reduce liquidity risk
5. Price risk - FI's Secondary claims have less price risk
6. Diversifying risks
Functions of Financial Institutions - Answers - Brokerage function - Agent for savers,
reduce information and transaction costs
Asset-Transformation - Finance purchase of primary securities by selling financial
claims to households and other investors - issue more attractive claims to households
Regulation of FI's - Answers - Goal: ensure soundness of the overall system
5 types
1. Safety and Soundness - protect against failure of FIs, diversification of assets, no
more than 5% to one borrower. Regulatory policy- protect ultimate sources and users of
savings - prevent discrimination in lending
2. Investor Protected Regulation - aimed at protecting investors who use investment
banks directly/indirectly - protects against insider trading, malfeasance, lack of
disclosure, etc
3. Entry Regulation - level of entry impediments affects profitability and value of charter.
entry is regulated
4. Credit Allocation Regulation - support socially important sectors as housing and
farming. Req. for min amounts of assets in specific sectors, as well as max rates and
interest
5. Monetary Policy Regulation - banks have role in transmitting monetary policy from fed
res to economy - expansionary/contraction policy
Monitoring cost - Answers - When managers must monitor funds and track where they
are going - fund suppliers basically want documentation of their funds. This lowers
agency cost.
Liquidity cost - Answers - Financial Institution provide secondary claims which has
superior liquidity attributes. They are able to offer lower prices and can be confident to
liquidate due to the high diversification.
Liquidity can be fixed with time.
Price Risk - Answers - Risk the sell price will be lower than purchase price
Secondary claims issued by FIs have less price risk
, Information Cost - Answers - Costs which stem from doing due diligence in research,
analysis, etc.,.
Agency Cost - Answers - Idea that owners/managers of firms receiving savers funds will
take actions contrary to the best interest of savers
Thus FIs lower agency cost
Diversification - Answers - Splitting up assets/wealth to distribute risk - minimizing
losses, maximizing returns within constaints
Transaction Cost - Answers - Theory that when costs in the market are high - internalize
these activities within firm
If transaction cost in market was lower than inside the firm - then buy/sell on the market
By grouping their assets to purchase assets in bulk (house hold savers) or (principals)
can see lower transaction cost
FI Function as Asset Transformer - Answers - Purchase securities issued by corps such
as equity bonds and debt all are primary securities and than sell financial claims to
household user called secondary securities
Issues Financial Claims that are more attractive to household save than claims directly
from corps called secondary securities
These result in lower costs.
FI function as a Broker - Answers - FI acts as a agent for the saver by providing
information and transaction service
When FI preform these transactions, it results in Economies of scale and increased
efficiency
Ex. Investment research
Reduce info cost Reduce transaction cost
Encourages higher rate of savings
Credit Allocation Regulation - Answers - supports socially important sectors such as
housing and farming
Chapter 2: Depository Institutions - Answers - Financial institutions that accept deposits
from individuals and provide loans. Activities on both sides of the balance sheet, assets
and liabilities
3 Types of DI
