Tài chính doanh nghiệp - Chapter 4: The future of the financial system and the money and capital markets

Chapter 4The Future of the Financial System and the Money and Capital Markets Learning Objectives To explore the economic, demographic, social, and technological forces reshaping the financial system today.To learn about recent trends in the financial system and how they may affect us in the future.To understand how the problems the financial system faces today may affect its future, leading to a new financial marketplace.IntroductionPowerful forces are reshaping financial institutions and financial services today.These forces for change include powerful new trends within the financial sector itself, major changes in the structure and functioning of the economy, and new social and demographic trends that are altering the public’s need for new financial services.Financial ForcesReshaping the Money and Capital Markets TodayFinancial innovation - the development of many new financial services and instrumentsService proliferation - the expansion of the menu of financial services offeredCompetition - the intense struggle for the customer’s businessConsolidation - mergers and acquisitions have created financial giants out of numerous smaller financial-service providersFinancial ForcesReshaping the Money and Capital Markets TodayDeregulation - the lightening or elimination of government rules brought about by a strategy of privatization of the financial sector Convergence - the blurring of the traditional distinctions among different types of financial-service institutionsHomogenization - the growing similarity in the service menus offered by financial institutionsFinancial ForcesReshaping the Money and Capital Markets TodayGlobalization - the global expansion of operations and the falling of geographical barriersMarket broadening - the expansion of traditionally local markets to become regional, national, or even international in scope Securitization - the pooling of loans and the issuance of securities as claims against the loan poolSocial, Economic, & Demographic ForcesReshaping the Financial SystemAging population - there is a greater need for retirement, tax and estate planningChanging basic family unit - the rise in the proportion of single-parent households, parents and children living apart, immigrants, and well-educated working women will increase the demand for new forms of housing, daycare facilities, flexible work schedules, and less expensive medical careSocial, Economic, & Demographic ForcesReshaping the Financial SystemDisplacement of manufacturing industries by service industries in more developed economiesTechnological innovation - the dissemination and storage of information today is broader, cheaper, faster, and more accurateInternationalization of markets - such as the emergence of the European UnionForces Affecting the Financial System of the FutureDealing with Risk in the Financial System:The Challenges and OpportunitiesThe money and capital markets and the financial institutions that operate within them depend heavily on public confidence.Loss of public confidence not only produces adverse consequences for individual financial institutions but also damages the efficiency of financial market processes.Dealing with Risk in the Financial System:The Challenges and OpportunitiesThe strength and viability of financial institutions, and hence public confidence, can be promoted through:government insurance systemsFederal Deposit Insurance Corporation (FDIC)Pension Benefit Guaranty Corporation (PBGC)regulation of capital equity capital requirementsprivate responses market disciplinedeveloping better risk-management toolsRisk in the Financial System:The Challenges and OpportunitiesHowever, the efforts made at promoting public confidence are limited by the information problem - capital market investors can only approximately price the securities of institutions that do not fully disclose their financial condition and prospects.New Technology:The Challenges and OpportunitiesThe technological revolution in information analysis, storage, and transfer is moving at an accelerating pace.Global integrated electronic networks are changing the design and delivery of financial services:Internet or World Wide WebCellular telephones and hand-held computersSmart cardsNew Technology:The Challenges and OpportunitiesHowever, the adjustment of the public to the unfolding technological revolution will probably be slower than the revolution itself.The areas to watch include:friendliness of the user interfaceoperating costs and service pricesease of technological upgradesdata integrity and system securityThe Changing Mix of Financial-Service Suppliers:Challenges and OpportunitiesFinancial-service firms will face increasingly intense competition and price-sensitive customers.Financial institutions with extensive service delivery systems will have a competitive advantage.The Changing Mix of Financial-Service Suppliers:Challenges and OpportunitiesThe unfolding new markets will require new financial institutions and instruments, such as credit risk derivatives and additional secondary markets for loans.New institutions will also be needed to facilitate the continuing trend towards securitization of many of the credit-related assets held by lending institutions and other corporations.Consolidations and Convergences:The Challenges and OpportunitiesProponents argue that:The elimination of duplication will bring about substantial savings in operational costs.The broadening of services and customer segments will accelerate the growth in revenue.The greater diversification will reduce overall risk.The combination of expertise will result in higher-quality products and services. Consolidations and Convergences:The Challenges and OpportunitiesProponents argue that:The greater economies of scale will increase the affordability of the latest technologies.The greater efficiency in joint marketing and cross-selling will help tie in customers.Consolidations and Convergences:The Challenges and OpportunitiesOpponents point out that:The greater complexities of the firm may increase its operating costs.The public’s demand for “one stop” financial shopping may have been overestimated.Smaller financial-service companies may have their own competitive advantage.Smaller financial-service companies may compete effectively in terms of the range of services available by outsourcing part of their operations.Financial Services RegulationThe growing consolidation and convergence of financial-service companies poses major new challenges for the regulatory agencies charged with maintaining a competitive, yet safe and stable, financial system.This dual concern has led to the development of several different regulatory approaches. Financial Holding CompanyInsuranceCompanies,Underwritersand AgentsSecurity Brokers, Dealers and UnderwritersBankingFirmsOtherFinancial-ServiceCompaniesFinancial Services RegulationFinancial Holding Company ModelFinancial Services RegulationSubsidiary ModelBanking or Other Controlling FirmSecuritiesSubsidiaryInsuranceSubsidiaryOther Financial-ServiceSubsidiariesFinancial Services RegulationSingle Regulator ModelHolding Company or Parent FirmAffiliated and/or Subsidiary CompaniesOne Regulatory Agency Supervises the Operations of the Whole Financial Service FirmFinancial Services RegulationFunctional Regulator ModelHolding Company or Parent FirmSecuritiesFirmInsuranceCompanyBankHolding Company RegulatorSecuritiesRegulatorInsuranceRegulatorBank RegulatorFinancial Services RegulationThe difficulties of coordination and control in larger and more diversified financial institutions call for:employees who are well trained in coordination and control skills,strong internal auditing procedures and management information systems, andcontinual evaluation of subsidiary firms, profit centers, and service functions for their contributions to the goals of the financial firm.The Future of the Payments SystemTomorrow’s economy and financial marketplace will depend crucially upon the continuing ability of the world’s payments system to function efficiently, speedily, and accurately.In the U.S., the retail payments system lags behind the wholesale payments system in converting from expensive paper transactions to electronic systems.The Future Need forRegulation of Financial InstitutionsThe recent trend toward deregulation is likely to continue, leading to:reduced barriers to geographic diversification,reduced restrictions on the portfolio choices made by financial institutions,reorganization of regulatory agencies,reduced barriers to product-line diversification, andgreater reliance on firms’ self-assessments of financial risks.The Future Need forRegulation of Financial InstitutionsHowever, there are some regulations which will be maintained or even re-emphasized:financial disclosure regulations,privacy protection regulations,regulations pertaining to social responsibility, andregulations that promote a level playing field.Markets on the NetAmerican Bankers Association at www.aba.com/Industry+IssuesConsumer Law at www.consumerlaw.orgFederal Deposit Insurance Corporation at www.fdic.govFederal Reserve System at www.federalreserve.govFederal Trade Commission at www.ftc.govMarkets on the NetFinPipe at www.finpipe.com/derivglossary.htmNew York Stock Exchange at www.nyse.comPension Benefit Guaranty Corporation at www.pbgc.govQuote.com at www.quote.comU.S. Bureau of the Census at www.census.govChapter ReviewIntroduction: The Financial Markets in ChangeFinancial Forces Reshaping the Money and Capital Markets TodaySocial, Economic, and Demographic Forces Reshaping the Financial SystemChapter ReviewThe Challenges and Opportunities Presented by Recent TrendsDealing with Risk in the Financial System: Ensuring the Strength and Viability of Financial Institutions and Increasing Public ConfidenceThe Effect of New Technology on the Design and Delivery of Financial ServicesThe Changing Mix of Financial-Service Suppliers Consolidations and Convergences within the Financial SystemChapter ReviewA New Role for Financial-Services Regulation in an Age of Financial-Services Consolidation and ConvergenceThe Future of the Payments SystemThe Future Need for Regulation of Financial InstitutionsRegulations That Could Grow