Role and Overview of

financial markets and institutions

 Contents
1.1 Overview of financial markets
1.2 Overview of financial institutions/financial
intermediaries
1.3 Philippine financial system
 Financial Markets
•  Financial markets are structures/
arenas through which funds flow

Financial Institutions
•  Institutions that perform the essential
function of channeling from those with
surplus funds to those with shortages
of funds
What is a financial market?
https://www.youtube.com/watch?v=s58-mrPom7Q
 Why Study Financial Markets
and Institutions?
•  Markets and institutions are primary
channels to allocate capital in our
society
–  Proper capital allocation leads to
growth in:
• Societal wealth
• Income
• Economic opportunity
Why do financial markets
matter?
https://www.youtube.com/watch?v=X182ULoFrHw
Types of Financial markets

Foreign
Primary Money
exchange
VS VS
Secondary Capital Derivative
 Primary vs. Secondary Markets
•  Primary markets
–  markets in which users of funds (e.g., corporations and
governments) raise funds through new issues of
security (e.g., stocks and bonds)
•  Secondary markets
–  A market that trades financial instruments once they
are issued
–  Secondary markets add liquidity for risky investments
and encourage investment in primary markets.
Secondary markets also aid in price discovery,
providing up to date signals of the ongoing value of
firms. These signals also provide benchmarks for
corporate performance
 Money vs. Capital Markets
•  Money markets
–  markets that trade debt securities with maturities of
one year or less (e.g., Certificates of deposits and
Treasury bills)
–  little or no risk of capital loss, but low return
•  Capital markets
–  markets that trade debt (bonds) and equity (stock)
instruments with maturities of more than one year
–  substantial risk of capital loss, but higher promised
return
Figure 1.3
MONEY MARKET INSTRUMENTS
Treasury Bills- short-term obligations issued by the government
Federal funds- short-term funds transferred between financial
institutions usually for no more than one day
Repurchase agreements- agreements involving the sale of
securities by one party to another with a promise by the seller to
repurchase the same securities from the buyer at a specified
date and price
Commercial paper- short-term unsecured promissory notes
issued by a company to raise short-term cash
Negotiable certificates of deposit- bank-issued time deposits
that specify an interest rate and maturity date and are
negotiable (i.e. can be sold by the holder to another party)
Banker’s acceptance- time drafts payable to a seller of goods,
with payment guaranteed by a bank
CAPITAL MARKET INSTRUMENTS
Corporate stock- the fundamental ownership claim in a
public corporation
Mortgages- loans to individuals or businesses to
purchase a home, land, or other real estate property
Corporate bonds- long-term bonds issued by
corporations
Treasury bonds- long-term bonds issued by the
government
Government agency bonds- Long-term bonds
collateralized by a pool of assets and issued by
government agencies
Bank and consumer loans- loans to commercial banks
and individuals
Foreign Exchange (FX) Markets
•  FX markets
–  Markets in which cash flows from the sale
of products or assets denominated in a
foreign currency are transacted (e.g.,
trading dollar for yen)
1. Spot FX
•  the immediate exchange of currencies at current
exchange rates
2. Forward FX
•  the exchange of currencies in the future on a specific
date and at a pre-specified exchange rate
Derivative Security Markets
•  Markets in which derivative security
trades
•  Derivative security
–  a financial security whose payoff is linked
to (or “derived” from) another security or
commodity (e.g. options)
–  generally an agreement to exchange a
standard quantity of assets at a set price
on a specific date in the future,
–  the main purpose of the derivatives
markets is to transfer risk between market
participants.
 Philippine Financial Markets
•  Foreign exchange market
- peso-dollar trading are done through the
Philippine Dealing System (PDS)
•  Fixed-income exchange market
–  an electronic platform for trading, clearing and
settlement, and depository and custodianship
fixed-income securities and its derivatives
•  Stock market
- Philippine Stock Exchange, Inc. (PSE or the
Exchange) is the country's only stock
exchange for the purchase and sale of stocks
and other securities
 Flow of Funds in a World with FIs
Intermediated Financing

FIs
Users of (brokers) Suppliers of
Funds Funds

FIs
(asset
Cash transformer
s) Cash

Financial Claims Financial Claims

(equity and debt securities) (deposits and insurance policies)

•  Financial Institutions- institutions that

perform the essential function of channeling
funds from those with surplus funds to those
with shortages of funds
 Depository versus
Non-Depository FI
•  Depository institutions- accept insured
deposits
–  banks
•  Non-depository institutions
–  Contractual- receive contractual payments
•  insurance companies, finance companies,
pension funds,
–  Non-contractual:
•  securities firms and investment banks,
investment funds
 Types of FIs and definition
1.  Banks- depository institutions, whose major
assets are loans and whose major liabilities
are deposits
2.  Insurance companies- financial
institutions that protect individuals and
corporations (policyholders) from adverse
events
 Types of FIs and definition
4. Securities firms and investment
banks- financial institutions that help firms
issue securities and engage in related
activities such as securities brokerage and
securities trading

5. Finance companies- financial

intermediaries that make loans to both
individual and companies.
 Types of FIs and definition
6. Mutual funds- financial institutions that
pool financial resources of individuals
and companies and invest those in
diversified portfolios

7. Pension funds- financial institutions that

offer savings plan through which fund
participants accumulate savings during their
working years before withdrawing them during
their retirement years
 Economic functions of FIs
•  Delegated monitor- economic agent
appointed to act on behalf of smaller
investors in collecting information and/
or investing funds on their behalf
•  Asset transformers- financial claims
issued by FI that are more attractive to
investors than are claims directly
issued by corporations
 FI Benefit Suppliers of
Funds
•  Reduce monitoring costs
•  Superior liquidity attributes and lower
price risk
•  Reduce transaction costs
•  Provide maturity intermediation
•  Provide denomination intermediation
 FI Benefit the Overall
Economy
•  Provides efficient capital/ credit
allocation
•  Transmission of monetary policy
•  Provide for intergenerational wealth
transfers
•  Provide payment services
 Risks Faced by Financial
Institutions
•  Credit
•  Foreign exchange
•  Country or sovereign
•  Interest rate
•  Market or asset price
•  Off-balance-sheet
•  Liquidity
•  Technology
•  Operational
•  Insolvency
 Philippine Financial System
Total resources
27,855 financial institutions as
P23.479 trillion pesos as of of Aug 2020, majority are BSP
Jul-2020 (76% held by Universal supervised non-banks
and Commercial banks)

8.7% year-on-year growth for For 2019, bank’s net profit grew
2019 driven by banking assets 24.8% y-o-y to P230.7 billion
growth of 8.4% pesos

Source: BSP statistics

 BSP supervised Financial
Institutions
I. Bank
•  Universal and Commercial banks
•  Thrift banks
•  Rural and cooperative banks
II. Non-bank
•  Investment houses
•  Financial companies
•  Non-stock savings and loans associations
•  Pawnshops
 Top 5 Financial Markets and
Financial Institutions in the world
Financial Markets Financial institutions
(by market capitalization (by dollar value of assets
as of Mar-2020) as of Dec. 31, 2017)
1.  NYSE- $19.3 tn 1.  Industrial & Commercial
2.  NASDAQ- $13.8 tn Bank of China- $4.009 tn
3.  Tokyo stock exchange- 2.  China Construction Bank
$5.7 tn Corp. - $3.4 tn
4.  Shanghai stock 3.  Agricultural Bank of
exchange- $4.9 tn China- $3.253 tn
5.  Hong Kong stock 4.  Bank of China- $2.991 tn
exchange- $4.4 tn 5.  Mitsubishi UFJ Financial
Group- $2.787 tn
 Contents
1.1 Overview of financial markets
1.2 Overview of financial institutions/financial
intermediaries
1.3 Philippine financial system
End of 1.1
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