Financial Institutions and Market

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Unit I: Nature and Role of Financial system – Introduction; structure of financial system; Equilibrium in financial markets; financial system and economic development; Theories of Impact of Financial developments

Unit I - Introduction to Financial Institutions and Markets
Financial System- implies a set of Complex and closely connected institutions, markets, transactions, agents, practices, claims and liabilities in a economy What is the financial system concerned with?  Money  Credit  Services  finance Functions of Financial system  Financial Institutions- act as mobilisers and depositories of saving and as the custodian of finance.  Provides various financial services to the society. Financial institution  A financial institution is an institution whose primary source of profits is through financial asset transactions Classifications of Financial Institutions        Banks Stock Brokerage Firms Non Banking Financial Institutions Building Societies Asset Management Firms Credit Unions Insurance Companies

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Functions of Financial Institutions  The principal function of financial institutions is to collect funds from the investors and direct the funds to various financial services providers in search for those funds. Financial Markets  A financial market is a market in which financial assets are traded. In addition to enabling exchange of previously issued financial assets Six basic functions of financial markets  Borrowing and Lending  Price Determination  Information Aggregation and Coordination  Risk Sharing  Liquidity  Efficiency Financial Instruments  Financial instruments are cash, evidence of an ownership interest in an entity, or a contractual right to receive, or deliver, cash or another financial instrument. Categorization of Financial Instruments  Cash instruments :are financial instruments whose value is determined directly by markets. They can be divided into securities, which are readily transferable, and other cash instruments such as loans and deposits, where both borrower and lender have to agree on a transfer  Derivatives instruments: are financial contracts, or financial instruments, whose prices are derived from the price of something else Equilibrium in financial Markets  When the expected demand for funds matches with the planned supply of funds generated out of saving and credit creation or when the total desired borrowing is equal to the total desired lending. Determinants of supply of funds  Aggregate savings by the household sector  Aggregate savings by the business sector  Aggregate savings by the government Determinants of demand for funds  Investment in fixed and circulating capital (working capital)  Demand for consumer durables  Investment for housing Theories on savings and investment  Prior Savings Theory- Samuelson  Credit Creation Theory- Kalecki and Schumpeter  Theory of forced Savings- Keynes and Tobin  Financial Regulation theory- Stiglitz  Financial Liberalisation Theory- Mckinnon and Shaw

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Prior Savings Theory- Samuelson  Saving as a Prerequisite for Investment  Appropriate monetary and fiscal policy  Generate high rate of inflation  Controlled by interest rate  Role of financial system – to promote financial development-transformation like  Liability- Asset transformation  Size- transformation  Risk- transformation  Maturity- transformation...
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