Adopted from “Financial Markets and Institutions” – Saunders & Cornett

For TCHE401/TCH401E Classes in FTU only, no further distribution/reproduction allowed.

Markets and institutions are primary channels to allocate capital in
our society.
Proper capital allocation leads to growth in:
Societal wealth.
Income.
Economic opportunity.

In this course we will examine:

the structure of domestic and international markets.
the flow of funds through domestic and international markets.

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Financial markets are one type of structure through which funds
flow and securities are bought and sold.
Financial markets can be distinguished along two dimensions:
primary versus secondary markets.
money versus capital markets.

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Primary markets.
Markets in which users of funds (e.g., corporations) raise funds by issuing
new financial instruments (e.g., stocks and bonds).
Secondary markets.
Markets where existing financial instruments are traded among investors
(e.g., exchange traded: NYSE and over-the-counter: NASDAQ).

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Figure 1-2 Primary and secondary Market Transfer of
Funds Time Line

Access the long description slide.

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How were primary markets affected by the financial crisis?
Do secondary markets add value to society or are they simply a
legalized form of gambling?
How does the existence of secondary markets affect primary markets?

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Money markets.
Markets that trade debt securities with remaining maturities of one year or
less (e.g., C D s and U.S. Treasury bills).
little or no risk of capital loss, but low return.
Capital markets.
Markets that trade debt (bonds) and equity (stock) instruments with
maturities of more than one year.
substantial risk of capital loss, but higher promised return.

Figure 1.3

Access the long description slide.

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FX markets.
Trading one currency for another (e.g., dollar for yen).
Spot FX.
the immediate exchange of currencies at current exchange rates.
Forward FX.
the exchange of currencies in the future on a specific date and at a pre-
specified exchange rate.

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Derivative security.
A financial security whose payoff is linked to (i.e., “derived” from) another,
previously issued security such as a security traded in capital or foreign
exchange markets, called underlying asset.
Generally an agreement to exchange a standard quantity of assets at a set price on a
specific date in the future.
The main purpose of the derivatives markets is to transfer risk between
market participants.
Derivatives could be used for two purposes:
Speculation: Increase risk exposure with hope for return
Hedge: Try to reduce risk, knowing that return opportunity is given up

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Derivative activity:
Tremendous growth between 1992-2013
Large drop from 2013 to 2019, due largely to the 2014
implementation of the Volcker Rule

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Selected examples of derivative securities.
Exchange listed derivatives.
Many options, futures contracts.
Over the counter derivatives.
Forward contracts.
Forward rate agreements.
Swaps.
Securitized loans.

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Mortgage derivatives allowed a larger amount of mortgage credit
to be created in the mid-2000s.
Growing importance of ‘shadow banking system’.
Mortgage derivatives spread the risk of mortgages to a broader
base of investors.
Change in banking from ‘originate and hold’ loans to ‘originate to
distribute’ loans.
Decline in underwriting standards on loans.

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Subprime mortgage losses were large, reaching over $700 billion.
The “Great Recession” was the worst since the “Great Depression” of the
1930s.
Trillions $ global wealth lost, peak to trough stock prices fell over 50% in the U.S.
Lingering high unemployment and below trend growth in the U.S.
Sovereign debt levels in developed economies reached post-war all-time highs.

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Financial markets need regulations in order to reduce the
consequences of market failures:
Efficient Market Hypothesis
Weak form
Semi-strong form
Strong form
Anomalies and the rise of behavioral finance
Information Asymmetry and its consequences
Adverse Selection
Moral Hazard

Luật Chứng khoán năm 2019

Luật Doanh nghiệp năm 2020
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Financial Institutions.
Institutions through which suppliers channel money to users of funds.

Financial Institutions are distinguished by:

Whether they accept deposits.
Depository versus non-depository financial institutions.
Whether they receive contractual payments from customers.
Contractual based institutions
Whether they collect fee
Fee based institutions

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Reduce monitoring costs.
Increase liquidity and lower price risk.
Reduce transaction costs.
Provide maturity intermediation.
Provide denomination intermediation.

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Conduit through which Central Banks conducts monetary policy.
Provides efficient credit allocation.
Provide for intergenerational wealth transfers.
Provide payment services.

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TABLE 1-7 Percentage Shares of Assets of Financial Institutions in the
United States, 1929–2013

Source: Randall Kroszner, The Evolution of Universal Banking and Its Regulation in Twentieth Century America,・in
Universal Banking Financial System Design Reconsidered, eds.
Anthony Saunders and Ingo Walter (Burr Ridge, IL: Irwin, 1996); and Federal Reserve Board, Flow of Funds Accounts,・
Statistical Releases, various issues. www.federalreserve.gov
1

Access the long description slide.

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Flow of Funds in a World without FIs
Direct Financing

Financial Claims (equity

and debt instruments)
Access the long description slide.

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Flow of Funds in a World with FIs.

Access the long description slide.

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Depository institutions:
commercial banks, savings associations, savings banks, credit unions.

Non-depository institutions.
Contractual:
insurance companies, pension funds,
Non-contractual:
securities firms and investment banks, mutual funds.

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Credit. Off-balance-sheet.
Foreign exchange. Liquidity.
Country or sovereign. Technology.
Interest rate. Operational.
Market. Insolvency.

Volcker Rule: Insured institutions may not engage in proprietary trading

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FIs are heavily regulated to protect society at large from market
failures.

Luật Ngân hàng Nhà nước Việt Nam năm 2010

Luật Các tổ chức tín dụng năm 2010 và Luật sửa đổi, bổ sung một
số điều của Luật Các tổ chức tín dụng năm 2017

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The pool of savings from foreign investors is increasing and
investors look to diversify globally now more than ever before.
Information on foreign markets and investments is becoming
readily accessible and deregulation across the globe is allowing
even greater access to foreign markets.
International mutual funds allow diversified foreign investment
with low transactions costs.
Global capital flows are larger than ever.

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The following trends are evident in the U.S. between 1948-2019:
Share of depository institutions declined from 62.7% to 30.9%
Insurance companies also witnessed a decline in their share, from 23.4% to
13.8%
Investment companies increased their share from 1.1% to 31.0%, while
pension funds increased from 9.1% to 13.2%
Overall assets increased from $0.27t to $75.21t

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Rise of financial services holding companies
Savers increasingly prefer investments that closely mimic
diversified investments in the direct securities markets over
the transformed financial claims offered by traditional FIs
Shift away from risk measurement and management and the
financial crisis
Under the traditional originate-and-hold banking model,
banks may have been reluctant to so aggressively pursue low-
credit-quality borrowers for fear of default

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Enterprise risk management
Recognizes the importance of managing the combined impact
of the full spectrum of risks as an interrelated risk portfolio
Seeks to embed risk management as a component in all critical decisions
throughout FI
Popularity rose as a result of the failure of advanced risk measurement and
management systems to detect exposures that led to the financial crisis
Stresses importance of building strong risk culture

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Financial technology, or fintech, refers to the use of technology to
deliver financial solutions in a manner that competes with
traditional financial methods
Includes services such as cryptocurrencies (e.g., bitcoin) and blockchain
Fintech risk involves the risk that fintech firms could disrupt business of
financial services firms in the form of lost customers and lost revenue
Supports models of peer-to-peer mass collaboration

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In 2016, banking sector assets amounted 194 percent of GDP and accounted for
more than 96 percent of the financial sector assets (insurance companies: 3
percent; and securities and fund management companies: 1 percent).
The four major state-owned credit banks (SOCBs) account for 45 percent of the
banking sector assets and provide half of total credit which, despite cutbacks in
recent years, remains heavily tilted towards the SOE sector.
Stock market capitalization increased to 33 percent of GDP, from 27 percent in
2015.
Attracting foreign capital remains challenging due to
(i) the lack of diversification of securities products;
(ii) the under-developed corporate bonds market;
(iii) the large share of state-owned capital in many enterprises; and
(iv) the low freedom level of capital mobility and the administrative constraints faced by
foreign owners.
Source: IMF staff country report 2017

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No. Type 2020 2021
1 State-owned commercial banks 4 4
2 Compulsory acquired banks 3 3
3 Social Policy Bank 1 1
4 Viet Nam Development Bank 1 1
5 Joint-stock commercial banks 28 28
6 Joint-ventured banks 2 2
7 100% foreign-owned banks 9 9
8 Foreign bank branches 50 51
9 Finance, leasing companies 26 26
10 Cooperative Bank 1 1
11 People’s credit funds 1,181 1,181
12 Microfinance institutions 4 4

Source: SBV annual report 2021

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Timeline of events

Home prices decline in late 2006 and early 2007.

Delinquencies on subprime mortgages increase.
Huge losses on mortgage-backed securities (MBS) announced by institutions.

Bear Stearns fails and is bought by J.P. Morgan Chase for $2 a share
(deal had government backing).

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Timeline of events

September 2008, the government seizes government-sponsored

mortgage agencies Fannie Mae and Freddie Mac.
The two had $9 billion in losses in the second half 2007.
Now run by Federal Housing Finance Agency (FHFA).

September 2008, Lehman Brothers files for bankruptcy; Dow

drops 500 points.

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 Figure 1-9 The Dow Jones Industrial Average, October 2007–January
2010

Access the long description slide.

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 Figure 1-10 Overnight London Interbank Offered Rate (L I B O R),
2001–2010

Access the long description slide.

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Figure 1-11 Federal Funds Rate and Discount Window Rate—January
1971 through January 2010

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