Financial Institutions, Markets, and Monetary Policy

Flashcards from lecture notes on financial institutions, central banks, financial markets, and monetary policy.

Why are financial institutions important?

Make the financial market function effectively.

Give examples of commercial banks.

BCA, Mandiri, BRI.

What type of company provides compensation for unforeseen events in exchange for premiums?

Insurance companies.

What is the purpose of management investment companies?

Managing investments to help them grow.

What kind of institution focuses on savings and providing loans, similar to a cooperative?

Savings and loans.

What services do investment banks provide?

Institution that help companies raise funds by issuing stocks or bonds.

What are Brokerages?

Companies where individuals can buy or sell stocks and other assets.

What do Investment Companies do?

Companies that pool money from investors and invest it.

Give some examples of nonbank financial institutions.

Leasing companies and fintech companies.

What are Shadow Banks?

Financial institutions that operate similarly to banks but are less regulated.

What is the name of the central bank in Indonesia?

Bank Indonesia (BI).

What is the primary role of a central bank?

Regulating and supervising all other banks.

What specific economic factors does a central bank manage?

Regulating inflation, interest rates, and printing money.

What are Industrial Banks?

Banks that primarily finance the industrial sector or factories.

What is the purpose of Agriculture Banks?

providing loans or services to farmers, ranchers, and the agricultural sector.

What is the main focus of Saving Banks?

helping people save money.

What functions do Exchange Banks perform?

Managing foreign currency transactions, used for import-export activities.

How do financial markets contribute to the economy?

facilitates the flow of funds from those with excess capital to those who need it.

What is the core function of financial institutions?

Collecting money from those with surplus and providing it to those in need.

According to Indonesian law, what are the two main types of banks?

Bank Umum and Bank Perkreditan Rakyat (BPR).

Give an example of the types of bank such as BCA and Mandiri

Bank Umum.

Give an example of the types of bank that are typically smaller, regional banks

Bank Perkreditan Rakyat (BPR).

What is a financial market?

A place where people with excess money meet those who need money.

What is the main function of a financial market?

Making the economy run smoothly by directing money to where it is needed.

How do financial institutions act as intermediaries?

Providing indirect loans through intermediaries like banks.

What are the benefits of using financial institutions as intermediaries?

Lower costs, risk diversification, and reduced information asymmetry.

What are the two main problems related to information asymmetry in financial transactions?

Adverse selection and moral hazard.

What is 'adverse selection'?

Lending to someone who appears good but can’t repay.

What is 'moral hazard'?

Borrower becoming reckless after receiving funds.

Name one type of financial market

Debt market vs. stock market.

Name another type of financial market

Primary market vs. secondary market.

Name another type of financial market

Exchange (formal) vs. OTC (over-the-counter).

Name another type of financial market

Money market (short-term) vs. capital market (long-term).

What are some examples of international financial transactions?

Foreign bonds, Eurobonds, and Eurodollars.

What are the two main pathways for money to flow from lenders to borrowers?

Indirect Finance and Direct Finance.

Who are the typical lenders in the indirect finance pathway?

Households, companies, governments, or foreign entities.

How do lenders participate in indirect finance?

Storing money in intermediaries like banks, insurance companies, or cooperatives.

What is an advantage of indirect finance for borrowers?

Borrowers don't need to find investors themselves.

Who are the typical borrowers in the direct finance pathway?

Companies, governments, or households.

How do borrowers participate in direct finance?

Selling shares or bonds directly in the financial market.

What is an advantage of direct finance for companies?

Companies can obtain funds quickly.

How does indirect finance work in intermediation

Intermediaries are involved.

How does direct finance work in intermediation?

No intermediaries are involved (direct).

Give an example of indirect finance

Savings accounts and deposits.

Give an example of direct finance

Stocks and bonds.

Who bears the risk in indirect finance?

Borne by the bank.

Who bears the risk in direct finance?

Borne by the investor.

What are the risk and return characteristics of indirect finance?

Less risky but lower returns.

What are the risk and return characteristics of direct finance?

More risky but potentially higher returns.

What are the main objectives of financial institutions?

Reduce transaction costs, apply FinTech expertise, and provide liquidity.

How do financial institutions enhance process efficiency?

Advanced technology for transactions, assistance with hassle-free transactions, and provision of cash or credit access.

What is a common problem often faced by financial institutions?

Asymmetric information.

What is 'adverse selection' in the context of asymmetric information?

Incorrect choice before the transaction.

What is 'moral hazard' in the context of asymmetric information?

Person behaving recklessly after the transaction.

What are some solutions for adverse selection?

collateral, net worth, regulation and intermediation.

What are some solutions for the problems related to Moral Hazard

Monitoring debt contracts, covenants, collateral, and net worth.

How can conflicts of interest be avoided?

Transparency, auditing, and ethics.

What is a Conflict of Interest?

Occurs when a person or institution has conflicting interests that could lead to unfair decisions.

Name a typical characteristic of stage 1 of a financial crisis.

credit boom and bust, financial innovation, and overly risky lending.

How do overly Risky Lending occur?

Banks lend to overly risky clients when rules are relaxed and financial innovation takes place

Banks and investors do what when they rush to reduces debt?..

Debt and risk reduction.

Run Out of what when the financial system runs out of liquidity?

Lack of cash.

Name a typical characteristic of stage 2 of a financial crisis.

Asset price boom and bust.

The loosening of regulation and promotion of inventive financial products led to what?

Financial Innovation & Liberalization.

The rise of loans to purchase assets with easy credit conditions led to what?

Credit Boom to Purchase Asset.

In crisis because of banks start to fear & start tightening the rules of lending, what happens?

Banks Tighten Lending Standards.

What is the last of the three stages of causes of crisis?

High Uncertainty (Ketidakpastian Tinggi)

Why do Bank Panics happen?

People fear about banks so start rapidly want their money back.

Give an example of when Penarikan Dana Nasabah (Bank Run) occur

people are concerned about banks solvency so rush to withdraw their money.

What is Insolvensi (Kebangkrutan)?

The bank not having the available capital required for a bank run.

One thing that happens in crisis Stage 3 – Debt Deflation is prices are down but what happens to the debt?

Increase in Debt Burden.

In crisis Stage 3 – Debt Deflation why are people reducing shopping or investing?

Because people are scared they may lost their jobs.

Where was one the causes that kicked off the 2007-2009 crisis from

Complex financial innovations in the mortgage market.

What were the impacts that crisis of 2007–2009 had

When house costs plumet. Banks go bankrupt, shadow banking can not function and Market loses trust.

What assets do central banks posses?

Government securities and Discount loans.

What are examples of bank Liabilites (Kewajiban)?

Currency in circulation. and Reserves.

What is the main tool that is used by central banks for regulating the amount of cash with BELI or JUAL

Open Market Operations.

When will the central banks BELI surat utang?

The bank will inject more cash in market so people will spending or investing.

When would central bank sell surat utang (reverse repo)?

This happens where there inflation occur.

What policy can bank use to get a 'safety cushion' if the bank runs out of capital from central?

Kebijakan Diskonto (Discount Policy)

To prevent bank form using all capital, banks have a minimum reserve requirment, what it is called?

Giro Wajib Minimum (Reserve Requirement)

whats the bank intrest rate on the reserves for?

To influence banks to keep or lend cash.

What can be used on a crisis for unconventional tool ?

Quantitative Easing (QE)

The EU banks are called what?

ECB (Bank Sentral Eropa)

What is used by bank to manage inflations predictions?

Anchor Nominal

What situation will occur when we hit our inlation target after promissing it?

If we fail to meet that target we get Time-Inconsistency Problem.

What are all the bank Assets?

Reserves & Cash Items Securities Loans Other Assets/Physical Capital.

What are the liabilities of a commercial bank?

Checkable Deposits Time Deposits + Savings Deposit Borrowings Other Liabilities Bank Capital.

What are the management types in commercial banks?

1. Asset Management (Ngelola Aset) 2.Liabilty Management 3. Capital Adequacy Management 4. Off-Balance Sheet Activities

what is asset management aim?

find safe investment but most profit.

What is Liability Management aim?

Find capital for cheap to use for bank function!

What is Off-Balance Sheet Activities aim?

Dapet untung tambahan tanpa perlu masukin aset/kewajiban ke neraca!

To maintain the banks needs to do this.

Innovation.