An Overview of the Financial System

Comprehensive vocabulary flashcards covering the structure of the financial system, financial market instruments, intermediaries, and key Canadian regulatory agencies based on Chapter 2 of The Economics of Money, Banking, and Financial Markets.

Direct finance

A route through the financial system where borrowers attract funds directly from lenders/savers by selling securities (such as bonds or equity) in financial markets.

Indirect finance

A route through the financial system where a financial intermediary borrows funds from lender-savers and uses those funds to extend loans to borrower-spenders.

Bonds

Debt instruments representing a contractual agreement between a borrower (who issues the bond) and a lender (who owns it) specifying regular payments until maturity.

Equity

Financial instruments representing shares of ownership in a corporation that lack maturity dates, may distribute dividend payments, and treat holders as residual claimants.

Residual claimant

The status of equity holders meaning they are entitled to the remaining income and assets of a firm only after all other debt claimants have been paid.

Primary market

A financial market where newly issued securities are sold to initial investors, typically with the assistance and underwriting of investment banks.

Underwrite

A service provided by investment banks during a new securities issue in which they guarantee a minimum price to the issuing entity.

Secondary market

A financial market where previously issued securities are bought and sold among investors.

Brokers

Agents in financial markets who match buyers and sellers with each other.

Dealers

Financial market intermediaries who trade securities by offering to buy and sell at stated prices.

Exchanges

Secondary markets organized so buyers and sellers meet in a single physical location to execute trades, such as the Toronto Stock Exchange.

Over-the-Counter (OTC) markets

Secondary markets where dealers at multiple physical locations conduct trades bilaterally rather than converging at a centralized exchange venue.

Money markets

Financial markets where only short-term debt instruments with maturities of less than one year ($< 1\text{ year}$) are traded.

Capital markets

Financial markets where longer-term debt instruments with maturities greater than one year ($> 1\text{ year}$) and equity instruments are traded.

Foreign bonds

Bonds sold in a foreign country and denominated in the currency of that foreign country.

Eurobond

A bond sold in a foreign country that is denominated in a currency other than that of the country where it is issued.

Eurocurrencies

Foreign currencies held on deposit in banks located outside their country of origin.

Eurodollars

U.S. dollars deposited in foreign banks outside the United States or in foreign branches of U.S. banks.

Adverse selection

An asymmetric information problem occurring prior to a transaction where the potential borrowers most likely to default are the ones who actively seek loans.

Moral hazard

An asymmetric information problem occurring after a transaction where borrowers engage in activities deemed undesirable from the lender's perspective.

Depository institutions

Financial intermediaries that accept deposits and extend loans, comprising chartered banks, trust and loan companies, and credit unions and caisses populaires.

Contractual savings institutions

Financial intermediaries that acquire funds on a periodic contractual basis, including life insurance companies, property and casualty insurance companies, and pension funds.

Investment intermediaries

Financial intermediaries that intermediate capital through market mechanisms, comprising finance companies, mutual funds, and money market mutual funds.

Office of the Superintendent of Financial Institutions Canada (OSFI)

The federal regulatory agency setting capital adequacy, accounting, and board-of-directors standards and conducting bank audits for federally regulated Canadian institutions.

Canada Deposit Insurance Corporation (CDIC)

A regulatory agency providing deposit insurance up to $\$100\,000$ per depositor at a bank, examining books of insured banks, and restricting their allowable asset holdings.

Canadian Life and Health Insurance Compensation Corporation (CompCorp)

An agency that compensates policyholders if the issuing life insurance company enters bankruptcy.

P&C Insurance Compensation Corporation (PACIC)

An agency that compensates policyholders if the issuing property and casualty insurance company enters bankruptcy.