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Chapter 2

Chapter 2. Financial Intermediaries and Financial Innovation. Services of Financial Institutions. Transforming Financial Assets Exchanging Financial Assets on Behalf of Customers Exchanging Financial Assets for Own Account Assisting in the Creation of Financial Assets

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Chapter 2

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  1. Chapter 2 Financial Intermediaries and Financial Innovation

  2. Services of Financial Institutions • Transforming Financial Assets • Exchanging Financial Assets on Behalf of Customers • Exchanging Financial Assets for Own Account • Assisting in the Creation of Financial Assets • Providing Investment Advice • Managing Portfolios

  3. Role of Financial Intermediaries • Transfer of funds from savers to investors • Types of Investments • Direct Investment • For example, purchasing a portfolio of stocks and bonds • Indirect Investment • For example, purchasing an equity claim issued by an investment company

  4. Role of Financial Intermediaries • Providing Maturity Intermediation • Reducing Risk Through Diversification • Reducing Costs of Contracting and Information Processing • Providing a Payments Mechanism

  5. Role of Financial Intermediaries • Providing Maturity Intermediation • Reducing Risk via Diversification • Reducing Costs of Contracting and Information Processing • Providing a Payments Mechanism

  6. Asset/Liability Management • Spread and Non-Spread Businesses • Nature of Liabilities • Amount of cash outlay • Timing of cash outlay • Liquidity Concerns • Regulations and Taxation

  7. Nature of Liabilities of Financial Institutions

  8. Categories of Financial Innovation by Economic Council of Canada • Market-broadening instruments • Risk-management instruments • Arbitraging instruments and processes

  9. Categories of Financial Innovation by BIS • Price-risk-transferring innovations • Credit-risk-transferring instruments • Liquidity-generating innovations • Credit-generating instruments • Equity-generating instruments

  10. Causes of Financial Innovation • Increased volatility of interest rates, inflation, equity prices, and exchange rates • Advances in computer and telecommunications technology • Greater sophistication of market participants • Financial intermediary competition • Incentives to circumvent regulations and tax laws • Changing global patterns of financial wealth

  11. Asset Securitization • Meaning of Securitization • Basic Structure of Asset Securitization

  12. Benefits to Issuers • Diversification and Reduced Cost of Financing • Management of Regulatory Capital • Generation of Servicing Fee Income • Management of Interest Rate Volatility

  13. Other Benefits • To Investors • Greater liquidity • Reduced credit risk • To Borrowers • Lower lending rate spreads • Social Benefits

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