ECO 375 class notes

Week 1: Overview of financial system and global economy

I. Top level market participants :

1. Surplus units: market participants that receive more money than they spend
2. Deficit units: market participants that spend more than they receive

3. Typical surplus units:

1. Individuals
2. Foundations
3. Pensions

4. Typical deficit units:

1. Corporations
2. Governments
3. Individuals

5. What are some possible problems with direct interaction between surplus units and deficit
units? Be specific about the type of market participant.

1. Investors: security analysis, negotiation, search costs, transaction costs, concentration

risk
2. Corporations: negotiation costs, mismatch between average size of investor and funds
needed

6. The solution: financial intermediation

1. Markets and institutions that simplify the process for matching surplus and deficit units

II. Major types of securities

1. Money market securities: debt securities with maturity of less than one year
2. Capital market securities: securities with maturity of more than one year
1. equity
 2. debt
3. Derivative securities

III. Types of financial markets

1. money markets
2. capital markets
3. Primary markets
4. Secondary markets
1. concept of liquidity in the secondary market

IV. Major institutions

1. Depository institutions
1. offer deposit accounts for surplus units
2. repackage surplus units for deficit unit
3. risk-taking
4. better able to access credit-worthiness of deficit units than individual surplus units
5. typically large enough to limit concentration risk
6. Examples: commercial banks, savings institutions (S&Ls), credit unions
2. Nondepository institutions
1. generate funds from sources other than deposits
2. Examples
1. finance companies
2. mutual funds
3. securities firms
4. insurance companies
5. pension funds
3. Central Banks (Federal reserve)

V. Regulation
1. Major types of regulation
1. disclosure requirements
2. limits on scope or size
3. operational requirements

In-class project:

Has the internet increased or decreased the necessity of financial intermediation?

Examples: Peer-to-peer lending, Google's stock offering