Fin Inst 2 – Notes
Chapter 7 – why do financial institutions exist?
– Overview:
o 8 basic facts about the US financial structure:
▪ 1) Stocks are not the most important source of external financing for
businesses (but why?)
▪ 2) Issuing marketable debt and equity securities is not the primary way in
which businesses finance their operations (issuing marketable securities is
not the most important source of financing, but why don’t they?)
▪ 3) Indirect finance (activities of financial intermediaries) is way more
important than direct finance (business raise funds directly from lenders in
financial markets)
▪ 4) Financial intermediaries, mainly banks, are the most important source
of external funds use to finance business (loans)
▪ 5) The financial system is among the most heavily regulated sectors of the
economy
▪ 6) Only large, well established corps have easy access to securities
markets to finance their activities
▪ 7) Collateral is prevalent feature of debt contracts for both households and
businesses
• Collateralized debt – secured debt (predominant form in household
