BFF1001 Lecture 2: Foundations of Finance_Week2.1
It total assets earn less than total cost of capital, the business is involvement and
may not be able to continue operation.
Week 2: Financial Markets & Regulation
The efficient flow of funds is important for the efficient growth of the economy.
It means:
1. Capital is not mispriced
Mispriced: price paid is not appropriate, being over or under fair value. Value is
defined later.
2. Surplus and deficit units have liquidity
Liquidity: deficit units are able to raise the capital they need and surplus units
have enough capital to meet deficit units needed
There is sufficient depth of financial markets
Key benefits of Financial Intermediation
Asset Transformation = turning deposits into loans
Credit Risk Transformation and diversification = low risk deposists
turned into higher risk loans and different types of loans.
Liquidity transformation = short-term debt (deposits) used to fund long-
term assets (loans)
Economies of scale = the larger banks are, the cheaper intermediation
becomes.
Document Summary
It total assets earn less than total cost of capital, the business is involvement and may not be able to continue operation. The efficient flow of funds is important for the efficient growth of the economy. Mispriced: price paid is not appropriate, being over or under fair value. Value is defined later: surplus and deficit units have liquidity. Liquidity: deficit units are able to raise the capital they need and surplus units have enough capital to meet deficit units needed. Asset transformation = turning deposits into loans. Credit risk transformation and diversification = low risk deposists turned into higher risk loans and different types of loans. Liquidity transformation = short-term debt (deposits) used to fund long- term assets (loans) Economies of scale = the larger banks are, the cheaper intermediation becomes. Not all economic units can successfully engage in direct financing. They need to possess a sufficient level of financial sophistication, market reputation, credit worthiness and economic size/ influence.
