The Importance of Regulation in Financial IntermediariesWord文档下载推荐.docx
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The Importance of Regulation in Financial IntermediariesWord文档下载推荐.docx
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December10th,2010
Wordcount:
3300
Content
Introduction3
Thedefinitionoffinancialintermediaries3
1.CollectingSavings3
2.MakingPeople’sLifeConvenience4
3.OfferingLiquidityforUsers5
4.ReducingRisk5
5.DecreasingtheSceneofAsymmetryInformation6
Thenegativesideoffinancialintermediaries:
7
1.Financialintermediariesarethepushersoffinancialbubble7
2.Financialintermediariesisatransmissionoffinancialrisk9
3.Theinefficiencyinfinancialintermediaries10
4.Moralhazardinfinancialintermediaries12
Conclusion14
Reference15
Introduction
Thefinancialintermediariesarepartthatcannotbeignoredinfinancialmarket.However,itneedsregulationtomakesureitfunctionsintherightway.Thefollowingpartswillfirstdefinethefinancialintermediaries,andthenanalysethefunctionoffinancialintermediaries.Afterthat,itwilldiscussthatthefinancialintermediarieswillprobablybethepushersthefinancialbubbleandleadtotheeconomiccrashbyanalysingtheAmericanCrisisin2007.What'
smore,byinvestigatetheAsiaCrisisin1997,wefindthatwithoutregulationitwillbelimitedbyinefficiencyandmoralhazard.So,wegetaconclusionthatfinancialshouldberegulated.
Thedefinitionoffinancialintermediaries
ThefinancialintermediarywasdefinedbySiklosas“afinancialinstitutionthatconnectssurplusanddeficitagents.Theclassicexampleofafinancialintermediaryisabankthattransformsbankdepositsintobankloans.”(Siklos,2001:
p.35)Theexistenceoffinancialintermediaryenhancesthefinancialgrowth.Italsobenefitsthousandspeopleorcompanies.Afteryearsofdeveloping,financialintermediarieshaverootedinfinancefieldforitsimportantfunctions.
Thefunctionsoffinancialintermediariesarebasically:
collectingsavingsandlendingitout;
conveniencepeople’sdailylife;
offeringliquidity;
reducingrisk;
decreasingthesceneofasymmetryinformation.
1.CollectingSavings
Itiscommontoseethatbankscollectmoneyfromthousandsofindividual,householdorcompanieseverydayandlendittothosewhoneedthem.
Inordertothis,financialintermediaryshouldgainpeople’strust.Withthegovernmentregulation,andtheirprestigeandareasonablesumofmoneystored,financialintermediarysucceedingainlargesumofcustomers.Besides,theregulationsareveryimportantinregulatingfinancialintermediaries.Wewilldiscussthisintheexample.
2.MakingPeople’sLifeConvenience
Imaginethatwhenyougetupinthemorning,allthefinancialintermediariesdisappeared.Youhavenosafeplacetokeepyourextramoney.Thereisnoautomaticmachinetogetmoneydirectly.Youshouldkeeprecordofyourmoneyspend.Thiskindoflifeisadisasterforus.So,withtheappearanceoffinancialintermediaries,peoplecankeeptheirmoneysafe,getmoneyeasilyformautomaticmachine,andgetserviceonmoneyflow.
Everyday,peoplegotobanksandputtheextramoneyintotheiraccount.Banksandotherfinancialintermediariesprovidethisserviceforus.Andpeoplebelievebanksorthoseotherfinancialintermediarycanpromisethemoneysafe.
Besideskeepingmoneysafe,financialintermediariesalsoprovidefacilitiesthateasythedailytransaction.Whenweareshopping,wecanpaybyvisacards,gettingmoneyoutfromATM,orcheck.Thefinancialintermediarieshavealreadybuiltanetsystemandmadeadealforconnectingthebusinessandthebankaccounts.
Apartfromkeepingmoneysafe,andpayingthingseasily,financialintermediariesalsomakearecordforourmoneyflow.Still,takebankasanexample.Whenweopenedanaccountinthebank,bankwouldkeeparecordonallthetransactionwedid.Wepayforclotheswhenweareshopping.Wegetpaidbyworking.Wepayfortravel,arrangefeesforhigherstudies,orboughtCDs.Whenwegetold,weboughtusinsurance.Aperson’slifehaslargepartoftransactiontomakehimlivebetterinthisworldwiththebanks’recordingallthesethingsregularly.
However,inordertodoallthoseservices,theformalregulationsareveryimportantforfinancialintermediaries.
3.OfferingLiquidityforUsers
Stephensaid“Liquidityisameasureoftheeasewithwhichanassetcanbeturnedintoameansofpayment,namelymoney.”(p21)Thefinancialintermediariessucceedinprovidingthisserviceforus.Whenyouwantsomecashinemergency,youcaneasilygetthemfromATMsorbankswithalittlecost.
Takegovernmentbondsasanexample.Youneedcashforanemergency,however,allyourholdingsare£10,000bondsandyoucannotusethesebondsfortheemergency.Insuchacase,thefinancialintermediarieslikebrokerorevenbankswillhelpindividualtochangethebondstocashwithasmallcost.Thisisasmallcasetoillustratetheimportantofliquidity.Ineveryday’sfinancialmarkets,therearemanyindividuals,companiesorgovernmentneedtheexchangethefinancialassetsintocashandsomeotherswanttousecashtobuythosefinancialassets,likebonds,stocks.So,withtherunningofthosefinancialintermediaries,allentitiesorindividualsinthefinancialmarketgetwhattheywantinafastandeasyway.However,inordertomakesurethosefinancialintermediariesdotheseservicesinarightway,weneedsomeregulationstoregulatethem.
4.ReducingRisk
Everyoneknowsthatitisunsafetoputalltheeggsintoonebasket.Itisrisky.Likeourmoney,ifweputalloursavingbuyingonekindofstock.Whatifthecompanywillfaceacrisisinthenewfuture?
Thatmeansallyoursavingswilldisappear,andyouwillhavenothing.Theword‘diversify’givesusgoodsuggestion:
leaveyourselfmorechoicesinsteadofone.However,itishardlyforonetofindsolutionstodeducethisrisk.Insuchasituation,thefinancialintermediariestaketheresponsibility.Thosecompanieswillgivetheindividualssomegoodchoicestoinvestinseveralkindsofstocks.Thebanksalsofullyusediversifyingtoreducetherisk.Theylendthedeposittothosewhoneedthem,buttheyputasmallsumofoneperson’sdepositfortheloan.Tomakesurethatthosefinancialintermediariesrunintherightway,thereshouldbetheregulations.
5.DecreasingtheSceneofAsymmetryInformation
Therelationshipofborrowersandlendersarealwaysnotfair.Thelendersarenotsureofborrowers’credit.Ittakestimeandmoneyforborrowerstogetthisinformation.Thefinancialintermediariesgatherandsortouttheusefulinformationforlenders.Theyarelarge,powerfulcompanies.Theycaninvestigatetheborrowersandmakesuretheborrowerstheyselectedworthtrust.
Fromtheabovestatement,wecanseethesefinancialinstitutionsbenefitusalot.Theycollectthescatteredfundsinthemarket,andtheninvestinotherbusinesses.Theintermediarieshelptotransferthemoneyfromthecreditorstothedebtorsandmaketheprocessmoreeasily.Theytimelyprovidevarietyofinformationtothepublicsothatthey,‘tosomeextent,makeupthedefectcausedbytheinformationasymmetry’.Andtheordinarycouldmakemoresuitabledecisionsaccordingtothesepiecesofnews.Althoughtheintermediaryhasmanyadvantages,ithasseveraldrawbacks.Duetotheprofessionaltechnicalandcomplexity,themajorityofinvestors(thebuyer)donothavetoacquire,analyzetheabilityofobtainingfinancialmarketinformation.Onthecontrary,thefinancialinstitutionshavemoreprofessionaltalents.However,withtheconstantevolutionoffinancialintermediary,thisadvantagehasariskofbeingabused.Thatmeansitexistsmoralhazardproblem.Theinstitutionsmaydeliberatelyhidesomesignificantinformationwhichmayaffectdecision-making.Forexample,sinceShuanghuiinc(aChinesefoodcompany)holdbyGoldmanSachson2004,ithasgottenmorethan60%dividendsforfouryears.AndtheGoldmanSachsearned240%profitinaperiodofthreeyears.FromthenontheGoldmanSachsreducedthesharessharply.ButtheShuanghuihavenotreleasedtheclarificationannouncementuntilDecember200.Itisgenerallyacceptedthatthefinalpurposeofthefinancialintermediaryistomaximizeprofits.Andforthepurposeofgainingmoney,theagencymaymakeunduepolicies.Attheresultitwouldcausebubbleeconomy.Takefinancialcrisison2008asanexample,thereasonscontainzeromortgageandexcessiveeasycreditpolicy.Tosumup,wemustregulatethefinancialintermediarytoavoidtheserisks.Andtheauthoritiesindeeddevelopalotofmeasures.Firstly,thegovernmentbuiltasophisticatedregulatoryauthoritysystem.Forinstance,ChinahasCentralBank,ChinaBankingRegulatoryCommissionandChinaSecuritiesRegulatoryCommission.Theseagencieshelptoguardagainstanddefuserisksandmaintainfinancialstability.Alsosomearrangementshavetakenaction.Themostcommonapproachisthemandatorydisclosureoftherelatedtransactionsinformationofthefinancialintermediaries.Therearenumerouslawsaboutit.Stillthisisnotenough.
Inconsiderationoftheundevelopedfinancialsystem,thefinancialintermediariesshouldberegulatedseriously.Ifwedonotdothis,theconsequencemaybebad.Manyeconomiccriseshappenedbecauseofnegligenceofregulate.
1.Financialintermediariesarethepushersoffinancialbubble
Financialbubblesometimesisrelatedtopricebubble,marketbubbleorspeculativebubble.Itoccurswhenspeculatorspurchaseafinancialassetatapriceaboveitsfundamentalvalueintheexpectationofasubsequentcapitalgain(Radelet,S).
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