Financial Systems and Institutions Stud Name: Liang CHEN Stud ID: 270184LC USN: 0711866864223
PART 2.
Financial Service Authority
The regulatory agency in UK is the Financial Service Authority (FSA). The Financial Services Authority (\body and a company limited by guarantee that regulates the financial services industry in the United Kingdom. When acting as the competent authority for listing of shares on a stock exchange, it is referred to as the UK Listing Authority (UKLA), and maintains the Official list.The FSA has the legal form of a company limited by guarantee.
The SIB changed its name to the FSA on 28 October 1997 and now exercises statutory powers given to it by the Financial Services and Markets Act 2000, which replaced the earlier legislation and came into force on 1 December 2001. In addition to regulating banks, insurance companies and financial advisers, the FSA has regulated mortgage business from 31 October 2004 and general insurance (excluding travel insurance) intermediaries from 14 January 2005. The main tasks of FSA are as follow:
(1). Maintain the confidence of financial industry. (2). Promoting public understanding of the financial system, understand the different types of investment and the benefits and risks of financial transactions. (3). To ensure that businesses have adequate operating capacity and sound financial structure in order to protect investors. At the same time, educate investors have a correct understanding of investment risk. (4). Supervision to prevent and combat financial crime.
FSA is responsible for the supervision of banking, insurance and investment services, including the securities and futures.
U.S. Securities and Exchange Commission
The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The U.S.
5
Financial Systems and Institutions Stud Name: Liang CHEN Stud ID: 270184LC USN: 0711866864223
Securities and Exchange Commission (commonly known as the SEC) is an independent agency of the United States government which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets. The main reason for the creation of the SEC was to regulate the stock market and prevent corporate abuses relating to the offering and sale of securities and corporate reporting. The SEC was given the power to license and regulate stock exchanges. Currently, the SEC is responsible for administering seven major laws that govern the securities industry. They are: the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Sarbanes-Oxley Act of 2002 and most recently, the Credit Rating Agency Reform Act of 2006.
The enforcement authority given by Congress allows the SEC to bring civil enforcement actions against individuals or companies found to have committed accounting fraud, provided false information, or engaged in insider trading or other violations of the securities law. The SEC also works with criminal law enforcement agencies to prosecute individuals and companies alike for offenses which include a criminal violation.
To achieve its mandate, the SEC enforces the statutory requirement that public companies submit quarterly and annual reports, as well as other periodic reports. In addition to annual financial reports, company executives must provide a narrative account, called the \previous year of operations and explains how the company fared in that time period. Management will usually also touch on the upcoming year, outlining future goals and approaches to new projects. In an attempt to level the playing field for all investors, the SEC maintains an online database called EDGAR (the Electronic Data Gathering, Analysis, and Retrieval system) online from which investors can access this and other information filed with the agency.
6
Financial Systems and Institutions Stud Name: Liang CHEN Stud ID: 270184LC USN: 0711866864223
Quarterly and annual reports from public companies are crucial for investors to make sound decisions when investing in the capital markets. Unlike banking, investment in the capital markets is not guaranteed by the federal government. The potential for big gains needs to be weighed against equally likely losses. Mandatory disclosure of financial and other information about the issuer and the security itself gives private individuals as well as large institutions the same basic facts about the public companies they invest in, thereby increasing public scrutiny while reducing insider trading and fraud.
The SEC makes reports available to the public via the EDGAR system. SEC also offers publications on investment-related topics for public education. The same online system also takes tips and complaints from investors to help the SEC track down violators of the securities laws. Chinese CBRC
The China Banking Regulatory Commission (CBRC) is an agency of China authorized by the State Council to regulate the Chinese banking sector. The main functions of the CBRC:
(1).Formulate supervisory rules and regulations governing the banking institutions; Authorize the establishment, changes, termination and business scope of the banking institutions. (2).Conduct on-site examination and off-site surveillance of the banking institutions, and take enforcement actions against rule-breaking behaviors. (3).Conduct fit-and-proper tests on the senior managerial personnel of the banking institutions. (4).Compile and publish statistics and reports of the overall banking industry in accordance with relevant regulations. (5).Provide proposals on the resolution of problem deposit-taking institutions in consultation with relevant regulatory authorities. (6).Responsible for the administration of the supervisory boards of the major State-owned banking institutions; and Other functions delegated by the State Council.
7
Financial Systems and Institutions Stud Name: Liang CHEN Stud ID: 270184LC USN: 0711866864223
Maintenance of liquidity.
When bank customers attempt, en masse, to convert their deposits into cash at a large number of banks more or less simultaneously, economists call it a banking crisis. During the national banking period, the most severe banking crises occurred roughly every 10 years. Once a banking crisis got going, several things typically happened. First, bank reserves were depleted rapidly. Banks refused to make payments in cash, partially or completely. Firms had difficulty making their payrolls, and long-distance trade was interrupted. Interest rates went through the roof, and currency premia were charged. So it is quite important for the financial intermediaries to maintain the liquidity.
The link between liquidity and economic performance arises because many high return investment projects require long-term commitments of capital, but risk adverse lenders (savers) are generally unwilling to delegate control over their savings to borrowers (investors) for long periods. Financial systems mobilise savings by agglomerating and pooling funds from disparate sources and creating small denomination instruments. These instruments provide opportunities for individuals to hold diversified portfolios. Without pooling individuals and households would have to buy and sell entire firms.
Diamond and Dybvig (1983) show how financial intermediaries can enhance risk sharing, which can be a precondition of liquidity, and can thus improve welfare. In their model, without an intermediary (such as a bank), all investors are locked into illiquid long-term investments that yield high payoffs only to those who consume at the end of the investment. Those who must consume early receive low payoffs because early consumption requires premature liquidation of long-term investments. When agents need to consume at different (random) times, an intermediary can improve risk sharing – by promising investors a higher payoff for early consumption and a lower payoff for late consumption relative to the non-intermediated case.
8
Financial Systems and Institutions Stud Name: Liang CHEN Stud ID: 270184LC USN: 0711866864223
Financial markets can also transform illiquid assets (long-term capital investments in illiquid production processes) into liquid liabilities (financial instrument). With liquid financial markets savers/lenders can hold assets like equity or bonds, which can be quickly and easily converted into purchasing power, if they need to access their savings.
For lenders, the services performed by financial markets and intermediaries are substitutable around the desired risk, return and liquidity provided by particular investments. Financial intermediaries and markets make longer-term investments more attractive and facilitate investment in higher return, longer gestation investment and technologies. They provide different forms of finance to borrowers. Financial markets provide arms length debt or equity finance (to those firms able to access markets), often at a lower cost than finance from financial intermediaries.
Risk sharing
The second main service financial intermediaries and markets provide is the transformation of the risk characteristics of assets. Financial systems perform this function in at least two ways. First, they can enhance risk diversification and second, they resolve an information asymmetry problem that may otherwise prevent the exchange of goods and services, in this case the provision of capital. Financial systems facilitate risk-sharing by reducing information and transactions costs. If there are costs associated with the channeling of funds between borrowers and lenders, financial systems can reduce the costs of holding a diversified portfolio of assets. Intermediaries perform this role by taking advantage of economies of scale, markets do so by facilitating the broad offer and trade of assets comprising investors’ portfolios.
Financial systems can reduce information and transaction costs that arise from an information asymmetry between borrowers and lenders. In credit markets an information asymmetry arises because borrowers generally know more about their
9