FINMA: CHAPTER 2 - Shadow banking system - A group of

(OLDER EDITION) institutions that engage in lending

activities, much like traditional banks,
Financial Institutions and Markets but do not accept deposits and
- therefore are not subject to the same
3 external sources of funds: regulations as traditional banks
- financial institutions
- Financial markets Financial markets - Forums in which suppliers
- Private placement of funds and demanders of funds can transact
business directly.
Financial institution - An intermediary that
channels the savings of individuals, businesses, - Private placement - The sale of a new
and governments into loans or investments. security directly to an investor or group
of investors.
Key Customers of Financial Institutions - Public offering The sale of either bonds
- Individuals - net suppliers or stocks to the general public.
- Save > Borrow - Primary market - Financial market in
- Business Firms - net demanders which securities are initially issued; the
- Save < Borrow only market in which the issuer is
- Government - net demanders directly involved in the transaction.
- Secondary market - Financial market in
Major Financial Institutions which preowned securities (those that
are not new issues) are traded
- Commercial banks - Institutions that
provide savers with a secure place to
invest their funds and that offer loans to
individual and business borrowers.

- Investment banks - Institutions that

assist companies in raising capital,
advise firms on major transactions such
as mergers or financial restructurings,
and engage in trading and market
making activities.
Money market - A financial relationship created
between suppliers and demanders of
Glass-Steagall Act - An act of Congress
short-term funds.
in 1933 that created the federal deposit
- Marketable securities - Short-term debt
insurance program and separated the
instruments, such as U.S. Treasury bills,
activities of commercial and investment
commercial paper, and negotiable
banks
certificates of deposit issued by
 government, business, and financial dealers that “make markets” in the given
institutions, respectively. security.
- Eurocurrency market - International
equivalent of the domestic money Market makers - Securities dealers who “make
market. markets” by offering to buy or sell certain
- Nearly all Eurodollar deposits securities at stated prices.
are time deposits
Nasdaq market - An all-electronic trading
Capital market - A market that enables suppliers platform used to execute securities trades.
and demanders of long-term funds to make over-the-counter (OTC) market Market where
transactions. smaller, unlisted securities are traded.
- Key Securities Traded: Bonds and
Stocks Bid price - The highest price offered to purchase
- Bond - Long-term debt a security.
instrument used by business
and government to raise large Ask price - The lowest price at which a security
sums of money, generally from is offered for sale.
a diverse group of lenders.
- Common stock - units of International Capital Markets
ownership, or equity, in a Eurobond market - The market in which
corporation corporations and governments typically issue
- Preferred stock - A special form bonds denominated in dollars and sell them to
of ownership having a fixed investors located outside the United States.
periodic dividend that must be
paid prior to payment of any foreign bond - A bond that is issued by a foreign
dividends to common corporation or government and is denominated
stockholders. in the investor’s home currency and sold in the
investor’s home market.
Broker market - The securities exchanges on
which the two sides of a transaction, the buyer international equity market - A market that
and seller, are brought together to trade allows corporations to sell blocks of shares to
securities. investors in a number of different countries
simultaneously.
Securities exchanges - Organizations that
provide the marketplace in which firms can raise
funds through the sale of new securities and The Role of Capital Markets
purchasers can resell securities. firm’s perspective - capital market is to be a
liquid market
Dealer market - The market in which the buyer investors’ perspectives - capital market is to be
and seller are not brought together directly but an efficient market
instead have their orders executed by securities
 - efficient market - A market that such as stocks and bonds in the
establishes correct prices for the secondary market.
securities that firms sell and allocates - Securities and Exchange Commission
funds to their most productive uses. (SEC) - primary government agency
responsible for enforcing federal
FINANCIAL INSTITuTIONS ANd REAL ESTATE securities laws.
FINANCE

- securitization - The process of pooling Business Taxes

mortgages or other types of loans and - ordinary income - Income earned
then selling claims or securities against through the sale of a firm’s goods or
that pool in the secondary market. services.

- mortgage-backed securities - Securities Marginal versus Average Tax Rates

that represent claims on the cash flows - marginal tax rate - rate at which
generated by a pool of mortgages. additional income is taxed.
- average tax rate - firm’s taxes divided by
REGuLATIONS GOVERNING FINANCIAL its taxable income
INSTITuTIONS
- Federal Deposit Insurance Corporation Interest and dividend Income
(FDIC) - agency created by the - double taxation - Situation that occurs
Glass-Steagall Act that provides when after-tax corporate earnings are
insurance for deposits at banks and distributed as cash dividends to
monitors banks to ensure their safety stockholders, who then must pay
and soundness. personal taxes on the dividend amount.

- Gramm-Leach-Bliley Act - act that Capital gain - amount by which the sale price of
allows business combinations (that is, an asset exceeds the asset’s purchase price.
mergers) between commercial banks,
investment banks, and insurance
companies and thus permits these
institutions to compete in markets that
prior regulations prohibited them from
entering

REGuLATIONS GOVERNING FINANCIAL

MARKETS
- Securities Act of 1933 - act that
regulates the sale of securities to the
public via the primary market.
- Securities Exchange Act of 1934 -act
that regulates the trading of securities