CHAPTER 1

FINANCIAL SYSTEM;
"Financial systems are crucial to the allocation of resources in a modern economy. They channel household savings to the corporate sector and allocate investment funds among firms; they allow intertemporal smoothing of consumption by households and expenditures by firms; and they enable households and firms to share risks. These functions are common to the financial systems of most developed economies. Yet the form of these financial systems varies widely." A financial system is a network of financial institutions, financial markets, financial instruments and financial services to facilitate the transfer of funds. The system consists of savers, intermediaries, instruments and the ultimate user of funds. The level of economic growth largely depends upon and is facilitated by the state of financial system prevailing in the economy. Efficient financial system and sustainable economic growth are corollary. The financial system mobilizes the savings and channelizes them into the productive activity and thus influences the pace of economic development. Economic growth is hampered for want of effective financial system. Broadly speaking, financial system deals with three inter-related and interdependent variables, i.e., money, credit and finance

FUNCTION OF FINANCIAL SYSTEM;

Financial system works as an effective conduit for optimum allocation of financial resources in an economy. It helps in establishing a link between the savers and the investors. Financial system allows asset-liability transformation. Banks create claims (liabilities) against themselves when they accept deposits from customers but also create assets when they provide loans to clients.

Economic resources (i.e., funds) are transferred from one party to another through financial system. The financial system ensures the efficient functioning of the payment mechanism in an economy. All transactions between the buyers and sellers of goods and services are effected smoothly because of financial system.

Financial system helps in risk transformation by diversification, as in case of mutual funds. Financial system enhances liquidity of financial claims.

Financial system helps price discovery of financial assets resulting from the interaction of buyers and sellers. For example, the prices of securities are determined by demand and supply forces in the capital market.

Financial system helps reducing the cost of transactions.

FINANCIAL INSTABILITY;
The welfare costs of financial instability are often closely associated with monetary instabilities. Monetary instability may give rise to both inefficiencies and instabilities in the financial system. The Great Depression is a classic example of extreme financial instability that was, in part at least, induced By monetary instability.

ASYMMETRY INFORMATION;
In economics and contract theory, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry, a kind of market failure in the worst case. Examples of this problem are adverse selection,[1] moral hazard, and information monopoly.[2] Most commonly, information asymmetries are studied in the context of principalagent problems

ADVERSE SELECTION;
Adverse selection, anti-selection, or negative selection is a term used in economics, insurance, statistics, and risk management. It refers to a market process in which "bad" results occur when buyers and sellers have asymmetric information (i.e. access to different information): the "bad" products or services are more likely to be selected. A bank that sets one price for all its checking account customers runs the risk of being adversely selected against by its low-balance, high-activity (and hence least profitable) customers. Two ways to model adverse selection are with signaling games and screening games.

MORAL HAZARD;
In economic theory, moral hazard is a tendency to take undue risks because the costs are not borne by the party taking the risk. The term defines a situation where the behavior of one party may change to the detriment of another after a transaction has taken place. For example, a person with insurance against automobile theft may be less cautious about locking their car, because the negative consequences of vehicle theft are now (partially) the responsibility of the insurance company. A party makes a decision about how much risk to take, while another party bears the costs if things go badly, and the party insulated from risk behaves differently from how it would if it were fully exposed to the risk.

FINANCIAL INTERMEDIATION;

Financial intermediation consists of channeling funds between surplus and deficit agents. A financial intermediary is a financial institution that connects surplus and deficit agents. The classic example of a financial intermediary is a bank that transforms bank deposits into bank loans. Through the process of financial intermediation, certain assets or liabilities are transformed into different assets or liabilities. As such, financial intermediaries channel funds from people who have extra money (savers) to those who do not have enough money to carry out a desired activity (borrowers).

ADVANTAGES OF FINANCIAL INTERMEDIATION

There are 2 essential advantages from using financial intermediaries: 1. Cost advantage over direct lending/borrowing 2. Market failure protection the conflicting needs of lenders and borrowers are reconciled, preventing market failure The cost advantages of using financial intermediaries include: 1. Reconciling conflicting preferences of lenders and borrowers 2. Risk aversion intermediaries help spread out and decrease the risks 3. Economies of scale using financial intermediaries reduces the costs of lending and borrowing 4. Economies of scope intermediaries concentrate on the demands of the lenders and borrowers and are able to enhance their products and services (use same inputs to produce different outputs)

TYPES OF FINANCIAL INTERMEDIATION

Financial intermediaries include:

Banks Building societies Credit unions Financial advisers or brokers Insurance companies Collective investment schemes Pension funds

SUMMERY AND CONCLUSION;

Financial institutions (intermediaries) perform the vital role of bringing together those economic agents with surplus funds who want to lend, with those with a shortage of funds who want to borrow.

In doing this they offer the major benefits of maturity and risk transformation. It is possible for this to be done by direct contact between the ultimate borrowers, but there are major cost disadvantages of direct finance. Indeed, one explanation of the existence of specialist financial intermediaries is that they have a related (cost) advantage in offering financial services, which not only enables them to make profit, but also raises the overall efficiency of the economy. The other main explanation draws on the analysis of information problems associated with financial markets.

FINANCIAL MARKET;
A financial market is a market in which people and entities can trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand. Securities include stocks and bonds, and commodities include precious metals or agricultural goods. There are both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded). Markets work by placing many interested buyers and sellers, including households, firms, and government agencies, in one "place", thus making it easier for them to find each other. An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy such as a gift economy. In finance, financial markets facilitate:

The raising of capital (in the capital markets) The transfer of risk (in the derivatives markets) Price discovery Global transactions with integration of financial markets The transfer of liquidity (in the money markets) International trade (in the currency markets)

PRIMARY MARKET;
The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in theprospectus. Primary markets create long term instruments through which corporate entities borrow from capital market. Features of primary markets are:

This is the market for new long term equity capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called the new issue market (NIM). In a primary issue, the securities are issued by the company directly to investors. The company receives the money and issues new security certificates to the investors. Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business. The primary market performs the crucial function of facilitating capital formation in the economy. The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as "going public." The financial assets sold can only be redeemed by the original holder.

Methods of issuing securities in the primary market are:

Initial public offering; Rights issue (for existing companies); Preferential issue.

SECONDARY MARKET;
The secondary market, also called aftermarket, is the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold.[1] Another frequent usage of "secondary market" is to refer to loans which are sold by a mortgage bank to investors such as Fannie Mae and Freddie Mac. The term "secondary market" is also used to refer to the market for any used goods or assets, or an alternative use for an existing product or asset where the customer base is the second market (for example, corn has been traditionally used primarily for food production and feedstock, but a "second" or "third" market has developed for use in ethanol production).

MARKET PARTICIPANT;
The limit on the Market Participant Exception is that it allows a State to impose burdens on commerce within the market in which it is a participant but allows it to go no further. The State may not impose conditions, whether by statute, regulation, or contracts, that have a substantial regulatory effect outside of that particular market

REFRENCES;

According to Franklin Allen and Douglas Gale in Comparing Financial Systems Aggarwal, R and K Jacques (1997): A Simultaneous Equations Estimation of the Impact of Prompt Corrective Action on Bank Capital and Risk in Financial Services at the Crossroads: Capital. Aboody, David; Lev, Baruch (2000). "Information Asymmetry, R&D, and Insider Gains". Journal of Finance 55 (6): 27472766.doi:10.1111/0022-1082.00305. Brown, Stephen; Hillegeist, Stephen; Lo, Kin (2004). "Conference calls and information asymmetry". Journal of Accounting and Economics 37 (3): 343 366. doi:10.1016/j.jacceco.2004.02.001.

^ Chandler, Seth J.. "Adverse Selection". The Wolfram Demonstrations Project. ^ Dembe, Allard E. and Boden, Leslie I. (2000). "Moral Hazard: A Question of Morality?" New Solutions 2000 10(3). 257-279 ^ a b Siklos, Pierre (2001). Money, Banking, and Financial Institutions: Canada in the Global Environment. Toronto: McGraw-Hill Ryerson. p. 35.ISBN 0-07-087158-2. ^ Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 272. ISBN 0-13-063085-3. ^ Gahir, Bruce (2009). Financial Intermediation. Prague, Czech Republic.

T.E. Copeland, J.F. Weston (1988): Financial Theory and Corporate Policy, AddisonWesley, West Sussex (ISBN 978-0321223531) E.J. Elton, M.J. Gruber, S.J. Brown, W.N. Goetzmann (2003): Modern Portfolio Theory and Investment Analysis, John Wiley & Sons, New York (ISBN 978-0470050828) . South-Central Timber Development, Inc. v. Wunnicke, 467 U.S. 82 (1984).

CHAPTER# 2
FINANCIAL CRISES; The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults.[1][2] Financial crises directly result in a loss ofpaper wealth; they do not directly result in changes in the real economy unless a recession or depression follows. ASSEST BUBBLE; An Asset Bubble, is where the price of an asset is over inflated; usually due to high demand. They become over valued and these overvaluations can persist for many years until eventually bursting and causing the assets price to fall lower than its fair value. High money supply and liquidity in the financial system fuels a bubbles growth as it allows people to invest more money and allows investors to leverage their capital (borrowing from the banks and further investing in the asset). They are detrimental to the economy as when the bubble bursts it often bring wealth destruction and negative social, political and economical consequences. Bubbles form when excessive speculation circulates in a market and instead of investors looking at the intrinsic value of an asset they instead chase prices and focus on the resale value of the asset. Investors see the trend of rising prices and buy quantities of the assets in hope of profiting from the increase in value over the coming weeks/months. A sure warning sign of an Asset Bubble is when the general public are investing their money on the asset and there are many first-time investors entering the market; there may be articles in the newspaper about how e.g. a taxi driver has made thousands on the Stock Market. FINANCIAL PANIC (Financial panics) In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by economists as part of a normal business cycle. CAUSES OF FINANCIAL PANICS;

Many causes for the financial crisis have been suggested, with varying weight assigned by experts. The crisis was not a natural disaster, but the result of High risk, Complex financial products; Undisclosed conflicts of interest; And the failure of regulators, the credit rating agencies, And the market itself to rein in the excesses of Wall Street." Two factors that have been frequently cited include the liberal use of the Gaussian copula function and the failure to track data provenance.] LENDER OF LAS RESORT; A lender of last resort is an institution willing to extend credit when no one else will. Originally the term referred to a reserve financial institution, most often the central bank of a country, that secured well-connected banks and other institutions that are too-big-to-fail against bankruptcy. FINANCIAL CRISIS OF 2007-2008 Unsustainably high housing prices began to plateau in 2006, and then to reverse in 2007, as interest rates edged upwards and monthly payments on subprime loans increased according to their contractual terms. With this puncturing of the housing bubble, investors became concerned about the security of any investments related to the housing market. In a manner eerily reminiscent of the Panic of 1907, starting in the summer and early autumn of 2007, gradually increasing fear created disturbances in American and international credit markets. The Federal Reserve and its U.K. and European counterparts responded, but their efforts proved ephemeral. Liquidity in financial markets evaporated, major financial institutions reported large losses, and some appeared to be near collapse.

CHAPTER#3
BALANCE SHEET; In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a "snapshot of a company's financial condition. Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time of a business' calendar year. A standard company balance sheet has three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first and typically in order of liquidity. Assets are followed by the liabilities. The difference between the assets and the liabilities is known as equity or the net assets or the net worth or capital of the company and according to the accounting, net worth must equal assets minus liabilities. PRINCIPLES OF BANK MANAGEMENT;

INTREST RSTE RISK; This document consists of specific agreed principles that supervisory authorities will consider in evaluating banks' management of interest rate risk. The paper re-emphasises the need for banks to maintain adequate risk management practices in all their activities. It lays down eleven agreed principles that supervisory authorities will consider in evaluating banks' management of interest rate risk covering four categories.

the role of the board and senior management; policies and procedures; measurement, monitoring and control functions; internal controls.