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The example of development of a financial system

A mortgage loan in 70. From a building society

After some years of saving in a society In domestic currency Broadly varied ratę of interest, smaller sums extra

A mortgage loan 2007

From a rangę of

institutions

Instantly

Any currency, but ind. FX risk

Traditional repayment or long-term saving scheme (an endowment insurance policy)

What are the components of a financial system

•    Financial institutions

•    Financial markets

•    Financial instruments

•    Financial regulations

Financial institutions

•    „Firms” producing loans out of money lent by people

•    Market behaviour

•    Profit maximisers

•    Oligopolistic structure

•    Little competition on prices, great effort on product variety and marketing

What is special about financial institutions?

•    Products

•    Customers’ motivation to buy

•    Prudential regulations

Deposit-taking and non-deposit taking intermediaries

DTIs - e.g. universal banks, retail banks, investment banks, building societies Deposits Create national money supply

•    NDTls-life assurance companies, pension funds, unit trusts, investment trusts

•    Pay in response to a special event

The key features of financial intermediaries

•    Use markets

•    Issue securities to finance their activities (borrow from lenders)

•    Buy shares and bonds as part of their portfolio (lend to borrowers)

•    Not simply a brokerage

•    Allow to prolong periods of loans

•    Create liguidity