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The Role Played by Commercial Banks for the Performance of the Financial Markets

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1.A 1989 study titled Globalization and Canada’s Financial Markets, a research report prepared for the Economic Council of Canada, stated the following: An important feature of the increasing significance of some aspects of financial activity is the greater use of financial markets and instruments that intermediate funds directly—a process called “market intermediation,” which involves the issuance of, and trading in, securities such as bonds or stocks—as opposed to “financial intermediation,” in which the financial institution raises funds by issuing a claim on itself and provides funds in the form of loans.

a.Commercial banks are financial institutions that raise funds by issuing claims against themselves and then use the funds to provide loans. What do you think are the implications of the shift from financial intermediation to market intermediation for commercial banks?

b.What do you think some of the obstacles are in market intermediation?

2.In 2004, then chairman of the President’s Council of Economic Advisers, Gregory Mankiw, stated: “Expecting a government bailout if things go wrong creates an incentive for a company to take on risk and enjoy the associated increase in return.” Explain whether you agree or disagree with this statement.

3.In a March 17, 2009, speech titled “Finance: A Return from Risk,” delivered before the Worshipful Company of International Bankers in London, Mervyn King, governor of the Bank of England and chairman of its Monetary Policy Committee, stated: Banks are dangerous institutions. They borrow short and lend long. They create liabilities which promise to be liquid and hold few liquid assets themselves. That though is hugely valuable for the rest of the economy. Household savings can be channeled to finance illiquid investment projects while providing access to liquidity for those savers who may need it. Explain what Mr. King means.

4.Whose liabilities are harder to predict, those of life and health insurers or those of property and casualty insurers? Explain why.

5.In what three ways may an investment banking firm be involved in the issuance of a new security?

6.Explain at least three circumstances in which investment banking firms must commit their own capital

Keep in mind when answering the questions these points:
Explain the role of depository institutions the different types of institutional investors: insurance companies, pension funds, and collective investment vehicles.

 Relate how financial intermediaries provide at least one of four economic functions: maturity intermediation, risk reduction through diversification, reducing the costs of contracting and information processing, and a payments mechanism.

 Summarize the various roles governments play in the financial system.

 Describe the activities of investment banking firms and the various roles investment bankers play in mergers and acquisitions.

Respond to the short essay questions below. Ensure that your responses are thorough and cite to the text book and other academic sources. (NOTE: do not use Wikipedia or Investopedia as references). The text book is Capital Markets (5th ed) by Frank Fabozzi (2015).

The Role Played by Commercial Banks for the Performance of the Financial Markets

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