Notes

Subject 1: The financial market system (Chapter 1) Introduction * Development of financial markets has made the exchange of value for goods and services much easier. * Use of monetary value (money) * Money: any commodity that is widely accepted in a country as a medium of exchange. * Act as medium of exchange * Allows markets in goods and services to become much more efficient * Allows specialisation in production * Produce in surplus and sell to others * Solves the divisibility problem * Problem: need to establish the rate of exchange (the price) at which the trade will take place * Medium of exchange does not represent equal value for the parties to the transaction * Represents a store of wealth * Increases the speed and efficiency for transaction taking place * Facilitates saving (easier to save surplus funds) * Savings: deferring consumption into the future * Surplus unit: savers of funds available for lending * E.g. householders, companies, government, rest of the world * Deficit unit: borrowers of funds for capital investment and consumption * E.g. householders (Individuals), businesses and government, rest of the world * Funds saved by surplus units (savers with excess funds) can be put to use by borrowers or deficit units (those whose current demand for goods and services is greater than their current available funds) * Financial system * Exist because to ensure effective flow of funds between savers and borrowers. * Financial institutions and markets facilitate financial transactions between the providers of funds and the users of funds * Financial transaction takes place, it establishes a claim to future cash flows * Recorded by the creation of a financial asset on the balance sheet of the save * Financial asset: a financial instrument that states how much has been borrowed, and when and how much is to be repaid by the borrower * Buyers of financial instruments are lender that have excess funds today and want to invest and transfer that purchasing power to the future * Seller of the instruments are those deficit units that are short of funds today, but expect to have a surplus amount in the future which will enable the repayment of the current borrowings * Principle role of financial institutions and market: bring together providers of funds (savers) with users of funds * Ensure the soundness and stability of a financial system, nation-states establish legislation and regulatory authorities responsible for the prudential supervision of the financial system * Role of markets * Facilitate the exchange of things (goods and services) of value * Categorise as * real assets: a house, a car, and financial assets, such as a loan to buy a house or a car * bringing opposite parties together: enable the double coincidence of wants that is necessary before an exchange can take place * Double coincidence of wants: a transaction between two parties that meets their mutual needs * establishing rates of exchange * without markets * people could spend their whole time seeking out things they require but do not produce themselves * necessary to find someone who produce a surplus of what we want, and we have to produce a surplus of what others wanted * non-market exchanges can be very time consuming and difficult to carry out 1.1 Functions of a financial system * Financial system: * Comprises a range of financial institutions, instruments and markets, which interact to facilitate the flow of funds through the financial system. * Overseen by central bank, supervised by prudential regulator * Financial instrument: issued by a party raising funds, acknowledging a financial commitment and entitling the holder to specified cash flows * Flow of funds: movement of funds through a financial system * Surplus units: savers or providers of funds; funds are available for lending or investment * Transfer some of today’s income to the future when it can be used for consumption * Savings allows consumption in the future to be independent of future levels of earned income * Invest their savings through the purchase of financial instruments which are expected to improve their overall wealth * Rate of return: the financial benefit gained from investment of savings; expressed as a percentage * Expectation of a saver is to earn a positive rate of return * Providers of funds should consider their own particular needs when they purchase or invest in assets * This will affect the expected rate of return * An asset has four main attribute * Return or yield: the total financial benefit received (interest and capital gain) from an investment; expressed as a percentage * Risk: the possibility or probability that an actual outcome will vary from the expected outcome; uncertainty * Liquidity: access to cash and other sources of funds to meet day to day expenses and commitments * Time patter of cash flow: the frequency of periodic cash flows (interest and principal) associated with a financial instrument * Average person * Likes return and liquidity * Dislikes risk and prefer reliable cash flows * Since preferences are not identical, FIs and markets provide an enormous range of investment opportunities that have different levels of risk, return, liquidity and timing of cash flows. * 3 types of risk individuals * Risk averse: accept lower rate of return in order to reduce their exposure to risk * Risk neutral * Risk takers: accept more risk but will only do so if they are compensated by the expectation of receiving higher return * Asset portfolio: a combination of assets, each comprising attributes of return, risk, liquidity and timing of cash flows. * Participants alter their composition of their financial asset portfolio by changing their preferences in relation to the 4 attributes * Is a list of assets held by a saver * Portfolio restructuring: the buying and selling of assets and liabilities to best meet current savings, investment and funding needs * Major function of the financial system * Provide potential suppliers of funds with the combinations of the 4 attributes that best suit each saver’s particular portfolio needs * Financial system is also a provider of financial and economic information to market participants * Information affects price and investment decision * The provision of timely and accurate information is essential for an efficient financial system * Efficient financial system * Encourages an increase flow of savings * Results in economic growth, as savings are available for investment capital which can be used for the improvement of the productive capacity of an economy * Invest their funds with users that show a high probability of meeting those expectations * Savings are likely to be directed to the most efficient users of those funds * Further enhance the rate of economic growth * Role in implementing monetary policy * Monetary policy: actions of a central bank that influence the level of interest rates in order to achieve economic outcomes; primary target is inflation * Maintaining inflation within a specified level * Inflation: an increase in prices of goods and services over time; measured by the consumer price index (CPI) * Seeks to achieve a range of economic objectives such as increased employment and stability of the exchange rate of the currency * Is a combination of assets and liabilities comprising the desired 4 attributes 1.2 Financial institution * There is a wide range of FIs operating in the financial systems * Some offer similar products * Typically tend to specialise in areas where they have greater expertise * 5 types * Depository financial institution: accepts deposits and provide loans to customers * obtain a large proportion of their funds from deposits lodged by savers * e.g. on demand deposit accounts, term deposit accounts * E.g. commercial banks, building societies and credit cooperatives * Principle business is provision of loans to borrowers in the household and business sectors * Investment banks and merchant banks: specialist providers of financial and advisory services to corporations, high net worth individuals and government * E.g. advising clients on mergers and acquisitions, portfolio restructuring and financial risk management (OBS activities) * Provide some loans to clients but are more likely to advise and assist a client to raise funds directly from capital markets * Contractual savings institutions: offer financial contracts such as insurance and superannuation; large investors * Their liabilities are mainly contracts which specify that, in return for periodic payments made to the institution, the institution will make specified payouts to the holder of the contract if and when an event specified in the contract occurs * Periodic cash receipts provides a large pool of funds that they invest * Purchase both primary and secondary market securities * Payout include payments for claims made on an insurance policy, payment to a superannuation fund member on their retirement from the workforce * Finance companies and general financiers: borrow funds direct from markets to provide loans and lease finance to customers * E.g. issuing financial instruments such as commercial paper, medium-term notes and bonds in the money and capital markets * Provide lease finance to household and business sectors * Unit trusts: investors buy units issued by the trust, pooled funds invested (e.g. equity trust and property trusts) * Formed under a trust deed * Controlled and managed by a trustee or responsible entity * Attract funds by inviting public to purchase units in a trust * Funds obtained are invested by funds managers in asset classes specified in the trust deed * Generally specialise in certain categories of investment * Equity trust, fixed-interest trust, property trusts and mortgage trusts 1.3 Financial instruments * user of funds must prepare a legal document that clearly defines the contractual arrangement * known as a financial instrument and acknowledges a financial commitment and represents an entitlement to future cash flows * becomes a financial asset on the balance sheet of the provider of funds * represents debt, it will appear as a liability on the balance sheet of the borrower * represent equity, it will appear as part of shareholder funds * savers buy the ‘paper’ of the issuer * financial instruments divided into 3 broad categories which reflect the nature and main characteristics of financial instruments * equity (including hybrid instruments) * debt * derivatives 1.4.1 Equity * Equity: the sum of the financial interest an investor as in an asset; an ownership position * Equity in a business corporation is represented through the ownership of shares issued by a corporation * Ordinary share/ common stock: the principal form of equity issued by a corporation; bestows certain rights to the shareholder * List their shares on the stock exchange * Have no maturity date * Continue for the life of the corporation * Shares on the stock exchange may be sold to other investors at the current market price * Entitled to share in the profits of the business * Dividend: that part of a corporation’s profit that is distributed to shareholders * Value of corporation’s share may increase over time * Representing a capital gain * Event of failure of a corporation, shareholders are entitled to the residual value of the assets of the corporation, but only after the claims of all other creditors and security holders have been paid * Have the right to vote at general meetings, in particular for the election of members of the board of directors of the company * Hybrid security: a financial instrument that incorporates the characteristics of both debt and equity (e.g. preference shares) * Preference shares holders entitled to receive a specified fixed dividends for a defined period (similar to fixed interest payments), which is paid before any dividend made to ordinary shareholders * Rank ahead of ordinary shareholders in their claim on the assets of the corporation should the company be wound up or placed into liquidation * Liquidation: the legal process of winding up the affairs of a company in financial distress 1.4.2 Debt * Debt is a loan that must be repaid * Debt instruments: a contractual claim against an issuer, and requires the borrower to make specified payments, such as periodic interest payments and principal repayments over a defined period. * Specify conditions of a loan agreement; issuer/borrower. Amount, return, timing of cash flows, maturity date; debt must be repaid. * Types of debt instruments issued by corporation * Debentures and unsecured notes are longer term debt instruments issued into the capital markets * Commercial bills and promissory notes are short term instruments issued into the money markets * Term loans, mortgage loans and overdrafts are provided by FIs * Government debt instruments are treasury bonds and treasury notes * Entitle the holder to a claim (ahead of equity holders) to the income stream produced by the borrower and to the assets of the borrower if the borrower defaults on loan repayments * Divided into 2 sub categories on the basis of the nature of the loan contract * Secured debt: a debt instrument that provides the lender with a claim over specified assets if the borrower defaults * Secured debt contract will specify the assets of the borrower, or a third party, that are pledged as security or collateral * If borrower defaults, the lender is entitled to take possession of those assets to recover the amount owing * Unsecured debt * Another subdivision is based on the transferability of ownership of the instrument * Negotiable debt instruments: a debt instrument that can be sold by the original lender through a financial market * Can be easily sold and transferred from one owner to another * Commercial bill sold in the money market * Non-negotiable debt instrument: instrument that cannot be transferred from one party to another * A term loan obtained through a bank * Corporate debt 1.4.3 Derivatives * Derivative instrument: a synthetic security that derives its price from a physical market commodity or security; mainly used to manage risk exposure * Primarily used to manage an exposure to an identified risk * Commodities such as gold and oil * Financial instruments such as interest rate sensitive debt, currencies and equities * Used to manage risk exposure related to both equity and debt * 4 basic type of derivatives contracts * Future contract: an exchange-traded agreement to buy or sell a specific commodity or financial instrument at a specific price at a predetermined future date * Standardised contracts that are traded through a future exchange * Forward contract: an over-the-counter agreement that locks in a price (interest rate or exchange rate) that will apply at a future date * Flexible and negotiated over the counter with a commercial bank or investment bank * Option contract: the right, but not the obligation, to buy or sell a commodity or security at a predetermined exercise price; the option buyer pays a premium to the option writer * Buyer is not obliged to proceed with the contract is valuable * Buyer payers a premium to the writer of the option * Swap contract: an agreement between two parties to swap future cash flows; interest rate swaps and currency swaps * Ongoing interest payments are also swapped at the same exchange rate * Different from equity and debt * Do not provide funds for the issuer * Raise through equity or debt markets * Risk associated with equity or debt is managed using derivative contracts 1.4 Financial markets 1.5.4 Matching principle * Matching principle: short-term assets should be funded with short term liabilities; longer term assets should be funded with longer-term liabilities and equity * E.g. overdraft facility (short term loan): a fluctuating credit facility provided by a bank; allows a business operating account to go into debit up to an agreed limit * E.g. Bonds (long term liability): a long term debt instrument issued directly into the capital markets that pays the bond-holder periodic interest coupons and the principal is repaid at maturity * A borrower is able to match the cash flows associated with a source of funds (liabilities) closely with the cash flows generated from the use of funds over the life of a particular asset * Lack of adherence to this principle accentuated effects of frozen money markets with the ‘sub-prime’ market collapse. 1.5.5 Primary and secondary market transactions * Primary market transaction: the issue of a new financial instrument; funds are obtained by the issuer * Occurs when businesses, governments and individual issue financial instruments in the money and capital markets * Individual borrowing money from a bank is participating in a primary market transaction * Money: a commodity that is universally accepted as a medium of exchange * Economic growth is reliant on strong primary markets * Allow corporations and government to raise new funding that leads to increased capital and productive investment * Secondary market transaction: the buying and selling of existing financial securities; transfer of ownership; no new funds raised by issuer * Instrument traded in the secondary market are those initially created in the primary market * Have no direct impact on the amount of funding raised or available to the company that was the initial issuer of a financial instrument * Simply a transfer of ownership from one party to another * Existence of well-developed secondary markets has important impact s on the marketability of new primary market financial instruments or securities * Help overcome two potential obstacles that may stand in the way of savers providing funds for the financing of long-term capital investment * Saver’s preference for liquidity * Their aversion to risk * A deep liquid secondary market provides instruments to be bought and sold rather than holding it for a long period of time. * Encourage both savings and investment because they enhance the marketability and liquidity of primary-issue instruments, thus making them more attractive to savers. * Security: financial asset that are traded in a formal secondary market 1.5.6 Direct finance and intermediated finance * The funds may flow through a direct relationship from the provider of funds to the user of funds * The flow of funds may occur through a financial intermediary such as a bank * Each form is an important source of finance * Direct finance: funding obtained directly from the money markets and capital markets * Raised in primary market * The contractual agreement is between the provider of funds and user of funds * Not provided by financial institution * Broker: an agent who carries out the instructions of a client * Does not provide finance but receives a fee or commission for arranging the transaction between the two parties * Has no rights to the benefits that may flow from the purchase of the security * Not necessary for them to be involved at all in the transaction * Dealer: makes a market in a security by quoting both buy(bid) and sell (offer) prices * E.g. share issues, corporate bong and government securities * Advantages * Avoid cost of intermediation * Removes cost of a FI * Borrow from FI and pay a profit margin to the FI * Lower total cost * Allows borrower to diversify funding sources through a diverse range of markets * Access both domestic and international money market * Reduce risk of exposure to a single funding source or market * Greater flexibility in range of securities users can issue for different financing needs * More sophisticated funding strategies may be used to raise funds * Enhance its international profile * An increased profile in the financial markets may be beneficial in establishing a reputation in the markets for the firm’s goods and services * Disadvantage * Matching of preference * Amount may not be sufficient * Mismatch in maturity structure * Liquidity and marketability of a security * Not all financial instruments have an active and liquid secondary market through which they may be sold * Search and transaction costs * Can be quite high * Advisory fees, the cost of preparing a prospectus, legal fees, taxation advise, accounting advise, and specific expert advise * Assessment of risk, especially default risk * Difficult to assess the level of risk * Accounting and reporting standards may vary between nation-states, and information about an issuer may be limited to the prospectus and the issuer’s credit rating. * Intermediated finance: financial transaction conducted with a financial intermediary (e.g. bank deposits and bank loans); separate contractual agreements * Relationship that exist between the save, the intermediary and the user of funds * Intermediary has an active role * In providing finance to deficit units, acquires the ownership of the financial instruments that is created as part of the transaction * Obtains the rights to the benefits and risk associated with the ownership of that asset * Benefits: receipt of interest payments and repayment of principals * Default risk or credit risk faced. * Intermediary obtains funding from savers * Savers receive financial instruments issued by the intermediary * Contractual agreement then exist between the saver and the intermediary * Creates a separate contractual agreement with the borrower * Saver has no claim on the income or asset of the borrower * Entitlement reside with the bank * Saver only has a claim of the interest payment and return of principal at maturity from bank * Relies on borrower for repayment of the loan * Failure of the bank to recover the funds from the borrower does not change the contractual relationship the bank has with its depositor * Benefits of financial intermediation * Able to resolve investment and funding needs by satisfying the preference of both parties and at the same time make a profit * Able to transform short term deposit funds into longer term loan funds * Resolve the conflicting preferences of surplus units and deficit units * Encourage both savings and productive capital investment * Perform a range of function that are important to both savers and borrowers * Asset transformation: ability of financial intermediaries to provide a range of products that meet customers’ portfolio preferences * Offering a range of financial products on both sides of the balance sheet, including deposit, investments and loan products * FIs provide a range of deposit products which meet the varying preferences and need of their customers (demand deposit accounts, current accounts, term deposits and cash management trusts) * Provide a range of loan products (overdraft facilities, term loans, mortgage loans, and credit card facilities) * Maturity transformation: financial intermediaries offer products with a range of terms to maturity * Savers prefer great liquidity in their financial assets * Borrowers prefer longer term commitment in funds they borrow * Perform maturity transformation for 2 reasons * Unlikely that all savers would choose to withdraw their deposits at the same time * Deposit withdrawal are more or less matched by new deposits * FIs engage in maturity transformation rely on liability management * Liability management: where banks actively manage their sources of funds (liabilities) in order to meet future loan demand (assets) * If bank’s deposit base (liabilities) begin to decline below the level to fund their forecast loan portfolio (assets). The bank may adjust the interest rates that it offers in order to attract the necessary additional deposits * Bank would issue further securities (liabilities) directly into the money or capital markets to raise the additional funds required * Credit risk diversification and transformation: a saver’s credit risk exposure is limited to the intermediary; the intermediary is exposed to the credit risk of the ultimate borrower * FI has 2 advantages over most individual savers in managing investment * Intermediaries specialise in making loans * therefore develop an expertise in assessing the risk of potential borrowers * Expertise comes from the technical skills of the employees and systems in assessing and monitoring loan application, and also from the information that is acquired through prior dealings with the borrower. * Liquidity transformation: measured by the ability of a saver to convert a financial instrument into cash * Savers prefer liquid investments * Timing of a saver’s income and expenditure flows will not perfectly coincide * The transaction cost can often be quite high * FI has capacity to lower transaction fees by spreading fixed costs across a large number of transactions * Timing in carrying out transaction is also important. * Economies of scale: financial and operational benefits gained from organisational size, expertise and volume of business * Have resources to develop cost efficient distribution systems * Obtain cost advantages through effective knowledge management and the accumulation of financial, economic and legal expertise. * pass on efficiency gains in the form of reduced interest margins and fees 1.5.7 Wholesale and retail markets * Wholesale market: direct financial flow transactions between institutional investors and borrowers * Institutional investors: commercial banks, insurance offices, superannuation funds, investment banks, merchant banks, fund managers, finance companies, building societies, credit unions, government authorities, and large corporation. * Range from tens of thousands of dollar to millions of dollar * Cost of wholesale funds determined by a range of factors * Level of liquidity (surplus funds) within the financial systems * Future interest rate expectations * Maturity structure of investment opportunity * Investors are able to accumulate large quantities of surplus funds and use their market power and investment skills to obtain higher returns than would normally be available in retail market * Borrowers able to use their good credit standing in the markets to obtain access to those funds * Retail market: financial transaction conducted with financial intermediaries mainly by individuals and small to medium-sized business * Market participants are prize takers (FI is able to set both deposit and lending rates of interest) * Participants are not totally excluded from wholesale markets * Able to gain indirect access to the whole sale market through managed investment products such as cash management accounts and unit trusts 1.5.8 Money markets * Money market: wholesale markets in which short term securities are issued and traded * Less than 12 months * Bring institutional investors that have a surplus of funds and those with a short term shortage of funds * Institutional investors: participants in the wholesale markets (e.g. funds managers, insurance offices, banks) * Attractive to institutional investors as the market are (normally) highly liquid and securities issued are standardised and have well developed secondary markets * Borrowers view, one principal functions is to enable them to bridge the mismatch between their cash expenditures and their cash receipts * No specific infrastructure or trading place * Operate in both as primary markets and secondary markets * Enable participants to manage liquidity * Money market submarkets * Central bank: system liquidity and monetary policy * Use it to carry out transaction that will maintain, or change, the amount of liquidity that is available within the financial system * Amount of daily liquidity is affected mainly by government budget surpluses or deficits, official foreign exchange transactions and net sales of government securities * Amount of liquidity impacts interest rates in the market * central bank implements its monetary policy by targeting the cash rate, hence the central bank carries out money market transaction so that cash rate remains at target level * inflations remain within 2 to 3 % * Inter-bank market: the lending and borrowing of very short term funds by banks operating in the payments systems * Facilitates the management of the short term liquidity needs of the commercial bank * Each member of the payments system is required to maintain an exchange settlement account with the central bank * Important role is the lending of surplus exchange settlement account funds * These cleared settlement funds (same day funds) are required by the banks to maintain their exchange settlement account in credit * Real gross settlement for clearance has increased the profile of the inter- bank market * Bills market: an active money market for the issue and trading of bills of exchange (discount securities) * Discount securities: short term securities issued with a face value payable at maturity; does not pay interest; sold today at a discount to the face value * Commercial bill market is the largest component of the money market * Involves the trading of bank bills and non-bank bills * Have active secondary market in commercial bill * Allows market participants to manage their maturity preferences * Commercial paper market * Commercial paper: promissory notes (discount securities) issued into the money market by corporations with a good credit rating * Strength: ted to fluctuate with the overall performance of the economy * Issued on an unsecured basis, only corporation with a good credit rating are able to issue into the market * There is issue of secured commercial paper supported by asset-backed securities * Negotiable certificates of deposit market * Negotiable certificates of deposit: a short term discount security issued by a bank. * A source of liquidity funding for the banks * Increased levels of funds under management, the CD market has become increasingly important source of liquidity funding, giving the banks flexibility to manage the short term maturity structure of their balance sheets 1.5.9 Capital market * Capital markets: markets for longer term funding; includes equity, corporate debt and government debt, and is supported by the foreign exchange and derivatives markets * Original term to maturity in excess of one year * Both debt and equity instruments * Both domestic and international markets * Domestic market is important for economic growth as they provide long term funds necessary for productive investment * Diverse nature of capital market * Equity market: facilitate the issue of financial securities that represent an ownership interest in an asset (e.g. stock market) * Corporation issue ordinary share/common stock * Provides a source of long term funding that does not have to be repaid * Available to * Finance physical infrastructure such as buildings and equipment * Provide creditor confidence in dealing with the firm * Ensure the availability of funds to absorb abnormal losses * Improve the liquidity of the business * Corporate debt market: facilitate the issue and trading of debt securities issued by corporations (e.g. discount securities, bonds) * Represents a financial commitment that typically requires periodic interest payment to be made during the term of the debt arrangement, and repayment of principal (amount borrowed) * Medium to long term debt instruments * Term loans: provided by commercial, merchant and investment banks * Commercial property finance: loans secured by a registered mortgage over the business property being financed * Debentures: a corporate bond, where the security is given in the form of a change over the assets of the borrower * Unsecured notes: a corporate bond where no security attached * Subordinated debt: where the claims of the debt holders are subordinated against the other debt lenders * Lease arrange: periodic lease payments made in return for borrowing an asset * Securitisation: the sale of existing assets, such as mortgage loans, to generate new funds * Euro-market instrument: financial transactions conducted in a foreign country in a currency other than the currency of that country * E.g. AUS company issuing corporate bond in SG market that are denominated in USD. * Government debt market: government borrowing for short term liquidity needs, or longer term budget capital expenditure (T-notes, Treasury bonds) * T-notes: discount securities issued in the money market with maturities up to six months * T-bonds: issued in Australia with maturities ranging up to 10 years. * Mainly fixed interest securities * Half yearly interest payments, principal repayment repaid at maturity * Issued at a discount or premium over the face value depending on the yield of the fixed interest coupon * Crowding out: government borrowing that reduces the net amount of funds available for other lending in the financial system * Impact private sector * Foreign exchange market: markets that facilitates the buying and selling of foreign currencies * Important since the floating of exchange rates by the majority of nation-states and the deregulation of financial systems of the major economies of the world * International capital markets financial instruments would be denominated in a foreign currency * Interest payments and principal repayments related to international debt commitment require the borrower to purchase the necessary foreign currency in order to make those periodic payments * Exchange rate: the price of one currency against another * Foreign exchange risk: the risk that the exchange rate between currencies will changes * Other issues impacting exchange rate * Relative inflation * Relative interest rates * Relative national income growth * Government intervention * Exchange rate expectation * Derivatives market: markets in synthetic risk management product; futures, forwards, option, swaps. 1.5 Flow of funds and market relationship * Sectorial flows of funds: the flow of funds between surplus and deficit sectors in an economy; the business, financial, government, household and rest-of-the-world sectors * Domestic economy can be divided into 4 sector * Business corporation: on average be a deficit sector * Most need to borrow in order to fund their business activities * Financial corporation: tend to be a deficit sector * Financial institution fund the growth in their balance sheet by borrowing in the capital markets * Government: fluctuate between a deficit and surplus sector * Depends on budget policy objectives * Household sector: surplus sector * Accumulated savings of an aging population should ensure that this sector remains in surplus * Rest-of-the-world: a balancing item * Stable political environment and an economy that is strong and offers good growth potential would expect to attract savings from overseas investors. * Deregulation of the global capital market has allow this sector to become more sensitive to sudden shifts in the flow of funds, as investors are able to move funds from one market to another quite quickly with relative ease * Net borrowing and net lending of the major sectors of the economy vary between nation-states. * Flow of funds between sectors vary from year to year * Depends of factors like government budgetary actions, the level of economic activity, and the state of the business cycle * Fiscal policy: the management of annual revenues and expenditures of a government * Compulsory superannuation: employers must contribute minimum specified amounts into retirement savings for employees * Impacts on increased levels of savings within that sector of the market * Investment decisions will flow from an increase in retirement savings * Government guarantees provided to bank deposits and bank borrowings vary from country to country * Designated to increase confidence and stability in the nation-state financial system