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world of finance might seem to be a
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strange one when viewed from outside but
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like in Japanese you're gonna say gay
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all kinds of strange incomprehensible
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instruments elements practices
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institutions technical terms and
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generally a lot of people think that
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what comes from the world of finance
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generally isn't so good for the world of
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humans well that's a bit unfair more
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than a bit unfair as you can see I'm a
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bit of a fan of gigging again or paddle
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and you know kick out all came from the
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world of your Chi of the spirits and
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he's a good guy getting rid of the bad
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ones in the regulation of Finance of
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course and even decent financial firms
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themselves they're a little bit like
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eternal I think trying to drive out the
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bad ones from the industry so that as a
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whole
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finance society pretty well so how does
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finance serve human society ok well
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first of all of course it provides a
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payments mechanism this is just
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fundamental wherever you go these days
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you can waive a bit of plastic your
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phone or whatever we have virtual
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payment systems this is hugely
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significant it gives assurance and
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convenience so that's a basic element we
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see that financial institutions play a
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basic role in aggregation in bringing
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together lots of small amounts of
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savings for example your auto sridama
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you know your money that you give him a
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new year free gamble you put it in your
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bank banks a great that and they will
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lend it to borrowers who need large sums
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of money for example to build a factory
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to develop a new business for example
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then is a disaggregation function this
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is the reverse this is where large sums
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are money
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put for safekeeping either into banks or
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through a whole range of interesting
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financial instruments distributed to
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lenders of smaller finance so credit
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card companies for example effectively
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provided disaggregation function a large
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bank that takes huge deposits from its
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corporate clients for example you know
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Apple makes billions of dollars in free
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cash flow and they need to store that
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money somewhere so banks will take some
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of that cash and they will provide
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microcredit whether it's your credit
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card whether it's a car loan whether
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it's a home loan for example and now we
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ran another really important function
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your finance is overcoming timing
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preferences temporal preferences
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temporal being time typically if you've
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got some spare cash and you want to put
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it in the bank even if you can prepared
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to wait for a while to not touch it to
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get a higher interest rate for the most
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part people don't want to put money into
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a term deposit for instance take your
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keen in Japanese for more than a year on
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the other hand if you want to go and buy
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yourself a house you typically want to
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be able to repay that loan over
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something like 25 30 35 years okay so
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very different timing preferences so
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financial institutions and in this case
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banks in particular play this key role
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of taking deposits on a short-term basis
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and lending on a long-term basis now
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that entry that introduces potentially
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very large risks for the banks timing
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risks banks have to make sure that they
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maintain the confidence of their
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depositors if everyone suddenly wants
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their money back and they've lent it to
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borrowers then you can end up with a
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crisis which involves what we call a run
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on the banks so we see that there's a
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trust element but there's also just a
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managing of maturities problem so we'll
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often see that banks are offering
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different interest rates for different
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periods on term deposits sometimes it
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seems a little bit strange shorter terms
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are actually a higher interest rate than
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longer terms you think you should get
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paid a higher interest rate right for
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leaving the bank your money in the bank
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for longer but it may be that say in six
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months time or eight months time the
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bank has a whole lot of deposits coming
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due
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so it's maturity period is coming up in
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and there's no guarantee that the
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depositors will renew their deposits so
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we'll see that banks are constantly
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looking at these timing issues for when
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the potential obligations to return
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money to depositors come about and try
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and steer future depositors new
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customers new depositors into putting
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money for a certain period of time that
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suits that balancing of temporal risk
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there are two other functions that
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financial markets and institutions
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within them provide one of them is
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facilitation bringing for example
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lenders and borrowers together buyers
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and sellers investors and those who are
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capital needy bringing them together in
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various ways and I've spoken about
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facilitation in relay in relation to a
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range of other businesses that are
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emerging particularly with the rise of
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the digital economy
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now the other very important element and
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we can think of banks for example as
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taking on this key role is
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intermediation intermediation is where
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in finance speak the institution for
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example the bank interposes interposes
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its balance sheet into the transaction
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so when a bank takes the deposit from
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one party and it offers a loan to
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another party it goes through the
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institution of the bank the risk rests
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with the bank okay so this
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intermediation function and there's a
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very important reason why intermediate
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intermediating is such a common element
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for example with investment funds and so
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many other institutions they have the
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expertise to manage the risk they are in
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the market all the time they are
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investing in risk assessment in analysis
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and so it makes a lot of sense for those
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who have the best capacity to assess
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risk to bear the risk so intimate
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intermediation is a key element in
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finance just to remind us facilitation
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by contrast the facilitator does not
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take onboard the risk of the transaction
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so if we see a stock market and the
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stock brokers who are just simply
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bringing the buyers and sellers together
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it's at the risk of the buyer of course
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and the the seller may regret having
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sold two too cheaply subsequently for
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instance but all the facilitator has
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done is that kind of a matching exercise
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you know it's almost as if you introduce
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two friends they got married and they
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turned out to be not very happy and they
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turned around and wanted to blame you
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well you say hey I'm just the
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facilitator all I did was bring you
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together but the the risk was entirely
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upon yourselves okay in the case of
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intermediating whenever the firm
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interposes itself within the transaction
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it buys and then it plans to sell later
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on it has all of the in all of the risks
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involved shifts in price shifts in
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demand of course which underpin shifts
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in price and all of the risks associated
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with holding a product at a time so if
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you watch the movie margin call for
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example you can see that in a critical
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scene in that movie set at the the
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outbreak of the global financial crisis
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it sit around the time of the collapse
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of Lehman Brothers we can see there that
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the huge panic in the firm is that they
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realize that they have been engaging in
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intermediation they have been buying
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some assets assembling them in very
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complex into complex financial products
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and in selling it on to other investors
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and that it takes about a month to
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process all of this assembling of the
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different categories of investments into
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the product is selling an to oneself and
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with the the market suddenly having
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deteriorated they realized that they're
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in significant danger of having those
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assets rest on the
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books stay on their books so they've
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become responsible for these assets that
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are falling dramatically in price so
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anyone who gets into trading buying and
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selling is infective lis engaged in
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intermediation and in that movie margin
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call for example the actor who is the
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who plays the boss says that his role is
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to figure out when the music stops it's
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like musical chairs if no one's buying
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no one's selling you hope to have a
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chair you may not have no chair at all
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in a financial downturn you don't want
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to be caught holding assets that are
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going to decline a lot further in value
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so in term in intermediation is a very
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risky business you have to be good at
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that risk assessment but sometimes big
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unexpected events come along such as
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covert 19 for example the global
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financial crisis in 2007 2008 and your
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best models did not fully account for
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the risk that you bear facilitation is a
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safer business to be in but on the other
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hand facilitation always faces
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competition from new entrants into the
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market and particularly with the rise of
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the digital economy the entry costs for
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establishing new platforms for
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facilitating as we see this with budget
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stock broking companies for example a
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relatively low and so the margins have
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fallen dramatically so there's quite
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intense price competition in a whole
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range of businesses you need only to
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look at real estate agents to and how
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most countries have too many real estate
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agents so they're the key things with
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finance we shouldn't be scared by
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finance certainly when times are tough
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or when our own life circumstances are
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in a bad way sometimes financing
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financial institutions do arise seeming
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like evil spirits to make our life even
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more Missy but overall they should be
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thought of more as the lifeblood of a
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capitalist economy without very
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and financial systems and financial
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institutions who simply would not be
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matching the capital rich to the capital
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poor and the simple truth of capitalism
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Shihong shaggy of a market system is
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that it takes investment to grow
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businesses to employ people to serve
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customers and invariably there are going
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to be a lot of risks involved in any
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market system and ideally we can have a
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vibrant financial system that allows
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that risk to be shared with people who
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can most afford to bear it and of course
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those financial parties which play a
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role in helping to assess and price that
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financial risk are absolutely critical
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to the efficiency of managing that risk
