CAPITAL MARKETS GROUP 1

• Flow of Funds Account

  1. Used by economists to understand the investment behavior and identify any market trends

  2. Shows where entities who participate in the financial market obtain their funds and where they invest those funds
• Sector


  (in the parlance of the Federal Reserve) A group of players in the financial market
• Treasury Securities


  Securities issued by the U.S. federal government to raise funds
• Government-sponsored enterprises


  • Major participants in the financial market
  • Publicly owned shareholders
• One way to categorize the players who buy & sell securities in the U.S. Financial Market is by the way it is done by the U.S. Federal Reserve
• Are classified as financial and non financial corporation
• Federal Reserve categorizes players who buy & sell securities in the U.S. Financial market

  U.S.
• Flow of Funds Account


  Accounts that show where entities participating in the financial market obtain their funds and where they invest those funds
• Flow of Funds Account


  • Used by economists to understand the investment behavior and identify any market trends of players
• Sector


  (in the parlance of Federal Reserve) a group of players in the financial market
• The U.S. federal government raises funds by issuance of securities referred to as Treasury Securities
• Government-sponsored enterprises


  Major participants in the financial market, publicly owned with shareholders
• Non-financial corporations

  • Non-farm corporations classified as financial corporations
  • Non-financial corporations issue securities including common stock and debt obligations
  • Captive finance companies - the financial arms that participate in lending
• Depository institutions


  • Commercial banks
  • Savings & loan associations
  • Savings banks
  • Credit unions
• Insurance companies


  • Life insurance companies
  • Property & casualty insurance companies
• Asset management firms


  • Manage the funds of individuals, businesses, state & local government
  • Their primary compensation is the fees that they earn
• Investment banking firms


  Perform 2 general functions
• Entities that investment banking firms assist in obtaining funds

  • Corporations
  • US government agencies
  • Government-sponsored enterprises (GSEs)
  • State & local government
• Investment banking firms


  Act as a broker or dealer in the buying & selling of securities for investors who wish to invest funds
• Nongovernment entities


  • Commercial enterprises
  • Nonprofit (not-for-profit) organizations
• Commercial enterprises


  Have their primary objective the generation of a profit
• Nonprofit (not-for-profit) organizations


  Are not motivated by profit or any monetary gain but have as their primary objective financially supporting activities such as Education, Arts, Religion
• Non-profit organization


  Referred to as foundations or endowments, mainly set up by wealthy individuals or families
• Foreign investors


  Individuals, non-financial businesses and financial entities that participate in the U.S. financial market but are not domiciled in the U.S.
• Supranational institutions


  Organizations formed by 2 or more central governments through international treaties
• Liability types


  • Type 1 (known amount, known timing)
  • Type 2 (known amount, uncertain timing)
  • Type 3 (uncertain amount, known timing)
  • Type 4 (uncertain amount, uncertain timing)
• Liabilities of financial institutions

  The amount and timing of cash outlay that must be made to satisfy the contractual terms of obligations issued
• For some liabilities, the "law of large numbers" makes it easier to predict the timing and amount of cash outlays
• Type I liabilities


  Both the amount and timing of the liabilities are known with certainty (e.g. a financial institution known to pay $50,000 in 4 months)
• Type II liabilities


  The amount of cash outlay is known, but the timing is uncertain (e.g. a life insurance policy)
• Type III liabilities


  The amount of cash outlay is uncertain but the timing is known, which the interest rate adjusts periodically based on some index
• Type IV liabilities


  Involve uncertainty as to both the amount and timing of cash outlay (e.g. insurance products and pension obligations)
• Disclosure regulation


  Requires issuers of securities to make public a large amount of financial information to actual and potential investors
• Financial activity regulation


  Regulation consisting of rules about traders of securities on financial markets
• Regulation of financial institutions

  A form of governmental monitoring that restricts these institutions' activities and trading
• Risk-based capital requirements


  Capital requirements based on the risk faced by regulated financial institutions
• Regulation of foreign participants


  Government regulation that limits the roles foreign firms can play in the domestic market
• Financial innovation

  • Market broadening instruments - increase liquidity and availability of funds by attracting new investors
  • Risk management instruments - reallocate financial risk to those less averse to it
  • Arbitraging instruments & processes - enable investors and borrowers to take advantage of differences in cost and returns
• Types of financial innovations

  • Price-risk innovations
  • Credit-risk transferring instruments
  • Liquidity-generating innovations
  • Credit-generating instruments
  • Equity-generating instruments
• Price-risk innovations


  • Provide market participants with more efficient means for dealing price or exchange rate risk