San Beda College Alabang

Ian Abalos, MBA

San Beda College
Alabang
June 24, 2014 June 24, 2014
2
Financial System
It is through a countrys financial system that entities
with funds allocate those funds to those who have
potentially more productive ways to deploy those funds,
potentially leading to faster growth for a countrys
economy.
Production >> Employment >> Consumption

Y = C + I + G + X M

The financial system has three components:
1. Financial Markets
2. Financial Intermediaries (aka Financial Institutions)
3. Regulator of Financial Activities
FEL109R - Treasury Management
San Beda College
Alabang
June 24, 2014 June 24, 2014
3
Financial System
Financial
Intermediarie
s
Indirect Finance
Financial Markets
SSU/SIU/Lende
rs/Savers
Households
Companies
Government
Foreigners
DSU/DIU/Borro
wers/Spenders
Companies
Government
Households
Foreigners
Direct Finance
ASSETS ASSETS
ASSETS
ASSETS
REGULATION
FEL109R - Treasury Management
San Beda College
Alabang
June 24, 2014 June 24, 2014
4
Financial System
Indirect Finance: an institution stands between lender and
borrower.
Direct Finance: borrowers sell securities directly to lenders in the
financial markets.
Asset (Fund): any resource that is expected to provide future
benefits and, hence, has economic value.
Tangible assets: value depends on physical attributes
Intangible assets: represents a legal claim to some future
benefits (financial asset/financial instrument/security)
Financial Markets are markets for financial instruments e.g.
stocks, bonds etc, also called financial claims or securities. (Ex.
Interbank, Stock Exchange, Bond Market, Money Market, FX
Market)
Financial Institutions (also called financial intermediaries)
facilitate flows of funds from savers to borrowers. e.g. banks,
finance companies etc. (Ex. Banks, Insurance Companies,
Pension Funds, Mutual Funds)
FEL109R - Treasury Management
San Beda College
Alabang
June 24, 2014 June 24, 2014
5
Financial System
The budget position of any economic unit can be surplus
or deficit or balanced in a given budget period.
Surplus spending units ( SSUs) have income for the
period that exceeds spending, resulting in savings.

Other words for SSU are saver, lender, or investor.
Deficit spending units (DSUs) have spending for the
period that exceeds income.

Another word for DSU is borrower.
FEL109R - Treasury Management
San Beda College
Alabang
June 24, 2014 June 24, 2014
6
Financial Markets
A financial market is a market where
financial instruments are exchanged
(traded).
Financial markets provide the following
three major economic functions:
Price setting/discovery
Liquidity
Reduced transaction costs (search &
information costs)
FEL109R - Treasury Management
San Beda College
Alabang
June 24, 2014 June 24, 2014
7
Financial Intermediaries
Despite the important role of financial markets, their
role in allowing the efficient allocation for those who
have funds to invest and those who need funds may
not always work.
Financial intermediaries come in when there are
conditions that make it difficult for lenders or
investors of funds to deal directly with borrowers of
funds in financial markets. This is accomplished in a
two-step process:
obtaining funds from lenders or investors
lending or investing the funds that they borrow to
those who need funds
Financial intermediaries provide the following major
economic functions:
Maturity intermediation
Risk reduction via diversification
Cost reduction for contracting and information
processing
FEL109R - Treasury Management
San Beda College
Alabang
June 24, 2014 June 24, 2014
8
Financial Activities Regulators
Regulation takes one of four forms:
Disclosure regulation
Financial activity regulation
Regulation of financial institutions
Regulation of foreign participants
A strong financial system is vitally importantnot for Wall
Street,
not for bankers, but for working Americans. When our
markets
work, people throughout our economy benefitAmericans
seeking
to buy a car or buy a home, families borrowing to pay for
college,
innovators borrowing on the strength of a good idea for a
new
product or technology, and businesses financing
investments that
create new jobs. And when our financial system is under
stress, millions of working Americans bear the
consequences. Government
has a responsibility to make sure our financial system is
regulated
effectively. And in this area, we can do a better job. In
sum, the ultimate beneficiaries from improved financial
regulation are Americas workers, families and
businessesboth large and small.
Henry M Paulson, Jr. Secretary of the US Dept. of Treasury, March 31, 2008 FEL109R - Treasury Management
San Beda College
Alabang
June 24, 2014 June 24, 2014
9
Financial System Key Takeaways
Financial system development is linked to economic
growth.
The role of the financial system is to facilitate production,
employment and consumption.
Resources are funneled through the system so
resources flow to their most efficient uses.


FEL109R - Treasury Management