Wednesday, April 22, 2009

the only thing constant in the financial system

the only thing constant in the financial system is change, the pace of change in the activities of financial intermediaries accelerated in the 1980s and early 1990s. when I was an undergraduate money and banking student in 1979, small savers (as I definitely was) could invest in checking account (which paid no interest) and passbook savings accounts (which paid no interest) and passbook savings accounts (which paid a low rate of interest limited by regulation). higher yielding treasury bonds and corporate bonds were available only in large denominations to wealthy savers. By contrast, in the mid 1990s, financial intermediaries offer a broad array of products with market yields for small savers, including money market mutual funds and interest-bearing checking accounts. these new products are the result of financial innovation by and competition among banks and other financial intermediaries.
in 1979,government tightly regulated the lines of business of banks and other financial intermediaries. however, the pace of competitive innovation by financial intermediaries has led to calls for major changes in regulation.
Understanding the risk-sharing,liquidity, and information services provided by intermediaries helps in understanding the types of regulation needed and to predict how those intermediaries will respond to new regulation. because the pace of changes in the financial system is so rapid, that understanding provides a way to assess developments in financial intermediaries in order to analyze new financial products, to get job in the financial services industry, or to be informed about investment opportunities.

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