Chapter One: Overview of the Financial System & Financial Institutions

Definition-based vocabulary flashcards covering the components, functions, and classifications of the financial system and its institutions.

Financial System

A collection of financial markets, financial institutions, regulations, and techniques through which financial assets are sold and financial services delivered.

Surplus Units

Individuals or entities who save and provide scarce loanable funds to the financial system.

Deficit Units

Individuals or entities who borrow funds from the financial system to buy goods and services and to make investments.

Factor Markets

Markets in which consuming units sell their labor, managerial skill, and other resources to obtain income.

Product Markets

Markets where consuming units use income obtained from factor markets to purchase goods and services.

Financial Markets

A market in which financial assets or securities, such as stocks and bonds, can be purchased and sold.

Money Market

A segment of the financial market in which financial instruments with high liquidity and very short maturities of one year or less are traded.

Treasury Bill

Securities with a maturity of one year or less, issued by national governments in their own currency, and considered the safest of all possible investments.

Commercial Paper

An unsecured short-term debt obligation of a private-sector firm or government-sponsored corporation with a maturity between $90$ days and $9$ months.

Capital Market

A market designed to finance long-term investments with financial instruments that have original maturities of more than one year.

Corporate Stock

A certificate of ownership in a corporation that entitles the holder to receive dividends paid out of current company earnings.

Bonds

A debt instrument issued for a period of more than one year with the promise to repay the principal along with interest on a specified date.

Primary Market

A market for the trading of new securities, with the principal function of raising financial capital to support new investment.

Secondary Market

A market that deals in securities previously issued and provides liquidity to security investors by converting financial instruments into cash.

Financial Institutions

Institutions that intermediate between lenders and borrowers and channel the flow of savings from surplus units to deficit units.

Maturity Intermediation

The function of financial institutions taking short-term maturity deposits from surplus units and giving long-term maturity loans to borrowers.

Risk Diversification

An economic function of financial intermediaries involving the transformation of more risky assets into less risky ones by investing in a large number of companies.

Depository Financial Institutions

Intermediaries that derive the bulk of their loanable funds from deposit accounts sold to the public, such as commercial banks and credit unions.

Interest Free Banking

A banking business in which mobilizing or advancing of funds is consistent with Islamic Finance Principles and avoids receiving or paying interest.

Non-bank Thrift Institutions

Depository institutions like savings and loan associations, savings banks, and credit unions that accept deposits from the public.

Non-Depository Intermediaries

Institutions including contractual institutions (insurance and pension funds) and investment institutions (mutual funds) that provide protection or investment services.

Credit Risk

The risk of default by a borrower or by an issuer of a security.

Funding (Interest Rate) Risk

Risk caused by interest rate changes when depository institutions borrow long and lend short, or vice versa.

Tier 1 (Core) Capital

Capital that includes common stockholders' equity, certain types of preferred stock, and minority interest in consolidated subsidiaries.

Tier 2 (Supplementary) Capital

Capital that includes loan-loss reserves, perpetual debt, certain types of preferred stock, and subordinated debt.

Basel I Capital Minimums

Regulations requiring a minimum Tier 1 capital of $4\%$ of book value of assets and minimum total capital of $8\%$ of risk-weighted assets.