Bună Ziua!

1. Bună Ziua!

2. Financial Institutions and Markets Professor Lal C. Chugh

3. Financial Institutions and Markets • Economic Units Households Business Firms Governments [ local, state, central] Foreign Sector

4. Financial Institutions and Markets • Deficit Spending Units (DSU ) Expenditures exceed Receipts; Cash outflow is greater than cash inflow, hence need for funds. • Surplus Spending Units (SSU) Cash inflow exceeds cash outflow • Name DSU’s and SSU’s

5. Transfer Of Funds from Surplus to Deficit Spending Units Direct Financing Surplus Spending Units Households Business Firms Governments Foreign Sector Financial Markets Deficit Spending Units Households Business Firms Governments Foreign Sector Funds Funds Funds Funds Funds Funds Financial Intermediaries Indirect Financing

6. Financial Institutions and Markets • Direct Financing: Loan from friends & families (Angels), Venture Capital; SSU’s buy stocks and bonds of new companies in the markets • Indirect Finance: SSU’s deposit funds in FI’s and DSU’s get funds from FI’s

7. Financial Institutions and Markets • Financial Intermediaries: 1. Deposit Type Banks, Cooperative Credit Institutions, Savings Institutions for Housing, Mortgage Banks 2. Contractual Type Life Insurance, Casualty Insurance, Pension Funds

8. Financial Institutions and Markets • Financial Intermediaries continued: 3. Mutual Funds—Investment Companies Stock Funds, Bond Funds, Money Market Funds; “Net Asset Value”, Calculation of NAV ; Open-ended ; Closed ended 4. Non Bank Financial Institutions Consumer and Business Loans

9. Financial Institutions and Markets • All these FI’s have different types of assets and liabilities. For Example: 1. Banks have short term liabilities and relatively short term assets 2. Life Insurance companies have long term liabilities and long term assets 3. Investment Funds—according to goals

10. Financial Institutions and Markets • Role of FI’s---Indirect Finance 1. Denomination Intermediation Savers save in small amounts, Borrowers borrow in large amounts 2. Maturity Intermediation--liquidity SSU’s want short term assets, DSU’s want funds for a longer time

11. Financial Institutions and Markets • Role of FI’s—Indirect Finance: 3. Search Costs for DSU’s and SSU’s reduced 4. Diversification of Risk Banks reduce credit risk Mutual Funds reduce price risk Insurance companies reduce risk by pooling

12. Financial Institutions and Markets • Role of FI’s—Indirect Finance: 5. Currency Exchange Facilitate international trade and investments 6. Advice on risk reduction strategies 7. Providing guarantees to reduce cost of financing

13. Financial Institutions and Markets • Financial Markets: Stock Market 1.Existing stocks are traded— “Secondary” Market 2. New Shares of old firms, or shares of New Firms-- Initial Public Offering (IPO’s); Role of Investment Bankers

14. Financial Institutions and Markets • Financial Markets: Bond Markets Bond is an instrument of loan to firm/government. It has a coupon and a face value. Bonds are traded. Foreign Exchange Market Currencies are traded

15. Financial Institutions and Markets BOND Face Value 1000 $ Coupon 10% semi-annual 50$ each half year is paid by borrower

16. Financial Marketsin Romania • Bucharest Stock Exchange (BSE) Trading of stocks ---Joint Stock Companies; Some IPO’s Also Futures on Stock Index Also Bond Trading “BET” index of 10 companies; BET-C Index for all companies; Also Futures on shares and currency

17. Financial Markets in Romania • Sibiu Monetary, Financial and Commodities Exchange “BMFMS” “SIBEX” Trading in Futures/Options What is “Futures”? What is “Option”? Currency, Commodities, Shares and Indexes Both are regulated by the Securities Commission (CNVM)

18. Financial Markets • Municipality can issue bonds backed by its revenues—several have issued and are listed on BSE. Municipal Bonds • Mortgage Bonds—backed by the mortgages

19. Financial Institutions in Romania • Financial Sector has been expanding since 2004 • Ratio of FI’s assets/GDP in 2004=44%; Now over 75% • Banks are the most important in terms of assets. Non bank FI’s and Insurance Firms;

20. Financial Institutions in Romania • Foreign Investment into the financial sector • Private Capital in Banks; Govt. Capital—only a few (2). • Foreign Banks –Greece, Netherland and Austria---have a substantial ownership in the banking industry • Foreign Short term Deposits in foreign currency in the Romanian banking industry

21. Financial Institutions in Romania • Impact of Global Crisis ? If Foreign Banks reduce support to banking sector, What are the consequences? • Banks may not be able to make loans to companies and households. The economy suffers--Bad Debts increase. 2. Banks may not have sufficient equity to meet standards and maintain solvency

22. Financial Institutions in Romania • But: • Vienna Initiative—Parent Banks (9) have made a commitment to continue to support Romanian banks and branches. • IMF/EU loan provides a cushion. Conditions: Fiscal Austerity—Reduce Deficit—Pension Reform, Cuts in Govt. Personnel, Cuts in Wages

23. Financial Institutions in Romania • Progress is being made in that area. • Banks are in a stronger position Solvency Ratio; Deposit Insurance; Stress Tests • Romanian Economy is expected to grow faster [1.3% in 2010 instead of 0.3%] • Both IMF and EU have made favorable reviews. Funds have been released. • Vigilance on the deficit “Deficit Target” likely to be met

24. Thank You Mulţumesc!