THE ENVIRONMENT OF FINANCIAL MARKETS

It is the environment where businesses or individuals need to obtain capital

resources to finance their investments, which interact; For example, if you need to
acquire a fixed asset, and you do not have the necessary funds, you can obtain
them through the financial markets.

INSTITUCIÓN MERCADOS COLOCACIÓN

FINANCIERA FINANCIEROS PRIVADA
Capta ahorros Foros organizados de Papel de las
Transfiere a quienes varios tipos de fondos instituciones y
necesitan fondos Realizan mercados
transacciones En la facilitación del
financiamiento
empresarial

Financial institutions
They serve as intermediaries to channel the savings of individuals, businesses,
and governments into loans or investments.
The government requires financial institutions to operate within established
regulatory standards.
It is an institution that provides financial services to its clients or members (financial
intermediaries). Most financial institutions are regulated by the government.

Key clients of financial institutions

Providers and applicants are key funders of financial institutions and these are
individuals, companies and governments.
However, individuals, taken together, are net suppliers to financial institutions: they
save more money than they borrow.
Companies also deposit part of their funds in financial institutions, especially in
checking accounts at various commercial banks.
Major financial institutions
Commercial banks, savings and loan associations, credit unions, savings banks,
insurance companies, investment funds and pension funds. These institutions
attract funds from individuals, businesses, and governments, pool them, and make
loans to individuals and businesses.

Commercial Banks, Investment Banks and the Parallel Banking

System

BANCOS BANCOS DE SISTEMA BANCARIO

COMERCIALES INVERSIÓN PARALELO
Instituciones que ofrecen Instituciones que ayudan Grupo de instituciones
a los ahorradores un lugar a las compañías a dedicadas a las
seguro para invertir su recaudar capital, las actividades de préstamo,
dinero y que ofrecen asesoran en operaciones de manera muy similar a
préstamos a los individuos mayores como fusiones o los bancos tradicionales,
y las empresas. reestructuraciones pero que no aceptan
financieras, y participan depósitos y, por lo tanto,
en actividades de no están sujetas a las
negociación y creación de mismas regulaciones que
mercado. los bancos tradicionales.

Financial markets
They are forums in which providers and fund seekers carry out transactions
directly.
A market can be defined as an area or place where buyers or demanders and
sellers or suppliers of certain products, which can be goods or services, are found.
The products that are traded in the financial market are called financial assets and
give their holders the right to receive future flows of money.
The two key financial markets are:
The money market: These are transactions in short-term debt instruments, or
negotiable securities,
Capital market: These are transactions in long-term instruments (bonds and
shares) which are negotiated.

Relationship Between Institutions and Markets

All Financial institutions participate in the financial markets as suppliers and also as
requesters of funds for their activities or investments, the requesters of funds can
be ordinary individuals, companies, governments, whether national or foreign in a
Money Market or in a Capital Market.

Capital Market
Generally, short-term funds are traded in this market, that is, no more than one
year in duration. This is generated when an individual, a company, has saved
funds and wishes to invest them and earn benefits on them such as interest, for
which On the other hand, there are also individuals and companies that want to
finance a house, expand their company and require this type of short-term funds.

Capital Market
Just like the capital market, funds are traded in the Capital Market, but this time
long-term and government entities are also present in this market. In this type of
market, so-called Bonds are traded, which have a period of time. initial 10 years
and that pay their respective interests with their coupons, likewise, Preferred
shares are negotiated, which are often attractive to traders.

Brokerage and Consignment Market

These types of markets are where trading activities for both short- and long-term
securities take place. The Brokerage market is where the Buyer and the Seller
interact and negotiate the value of their shares, unlike the Consignment Market,
the sellers and buyers do not negotiate with each other, that is, they do not meet
since they do so through platforms who execute the orders. received from
consigning the values for the purchase.
 The Role of the Capital Market
From a business point of view, the Capital Market is a liquid market in which
companies interact to obtain external financing. The Capital Market seeks to
become the most efficient market in allocating funds or performance to companies,
giving a volume of very acceptable production for those who acquire them, many
times the fixed prices of the shares or negotiable securities are not those assigned
to them from their origin but rather the interaction between buyers and sellers since
this value is almost equal to the real value of the action.

THE FINANCIAL CRISIS

A financial crisis is understood as the phenomenon through which the financial
system that governs a country, a region or the entire planet enters into crisis and
loses credibility, strength and power. The financial crisis as a phenomenon is
characteristic of the capitalist system, one that is based on the exchange of
currencies for products and that is currently financial due to the importance of the
speculative and banking activities that occur in it.
For example:
 I need to send money to my brother who is in the United States but it is very
expensive for me to go there and give him the money, or for him to come
here and give it to him. A financial institution (bank, savings bank,...) offers
me the possibility of making a money transfer to its bank account in the
United States, in exchange for a commission for the intermediation services
provided.

Financial Institutions and Real Estate Finance

Financial institutions:
It is an entity that provides financial services to its clients, that is, a company that
offers its clients (families, companies, the State) services related to the money they
have or need.
For example:
  I need to send money to my brother who is in the United States but it is very
expensive for me to go there and give him the money, or for him to come
here and give it to him. A financial institution (bank, savings bank,...) offers
me the possibility of making a money transfer to its bank account in the
United States, in exchange for a commission for the intermediation services
provided.

Real Estate Finance:

It focuses on investment, acquisition and financing decisions of its fixed assets
(land, building, furniture, etc.), that is, financing, by both companies, individuals
and the State.
For example:
 The company “ABC” after having been at a round table with all the
executives of said company, made the decision to acquire land as part of its
fixed assets, which is expected to be one of the largest investments the
entity has made in the future. .

In the movie It's a Wonderful Life, the protagonist is George Bailey, who operates a
financial institution called the Bailey Building and Loan Association, shows a
relatively true portrait of the role that financial institutions played in granting credit
for investments in real estate for many years. Local banks accepted deposits and
then extended credit to local borrowers.

FALL IN PROPERTY PRICES AND DEFAULTS IN MORTGAGE PAYMENTS

The monthly behavior, from January 1987 to February 2010, of the Standard &
Poor's Case-Shiller index, a barometer of real estate prices in the 10 major cities in
the United States. Between July 1995 and April 2006 the index grew continuously,
without even declining for a single month. Therefore, rising home prices helped
keep mortgage rates low from the mid-1990s to 2006. Investments in real estate
and mortgage-backed securities appeared to involve minimal risk during that
period. Loans extended to subprime borrowers often had adjustable rather than
fixed interest rates, and many of these borrowers (and lenders) assumed that rising
home prices would allow borrowers to refinance their loans if they ran into difficulty.
to pay. Partly because of the growth of subprime mortgages, banks and other
financial institutions gradually increased their investments in real estate loans.
CRISIS OF TRUST IN BANKS
In Ecuador at the end of 1998, operational banking was made up of 38 institutions,
in addition to two banks in liquidation such as Mercantil Unidos and Andes; and,
two in sanitation, Préstamos and Tungurahua. The operational banking had for its
operations 9,024 million dollars in assets (US $237 million dollars on average) that
were financed with $7,846 million of liabilities and $1,177 million of equity.
The factors that caused the crisis were:
 Liberalization of banking law.
 Natural disasters and war conflict with Peru.
 Excessively high public debt.
 The devaluation of the sucre against the dollar.
 Political instability.
 Speculations.
 Fraud.

The law adopted in 1994 “Financial Institutions Act” was similar to Roosevelt's
scheme after the banking crisis in the US, which deals with a highly regulated
banking system, with different interest rates.
In 1998 the AGD (Deposit Guarantee Agency) was created, and the ICC imposed
taxes on the circulation of capital.
In 1999, a bank holiday was declared by the Superintendent of Banks and then
accounts were frozen.
In 2000, dollarization was introduced and exports fell to 8%, and exports rose.

THE GREAT RECESSION AND ITS SIDE EFFECTS

When banks came under intense financial pressure in 2008, they began tightening
their lending standards and sharply reduced the amount of loans they made.

As a result, companies began hoarding cash and cutting expenses, and economic
activity contracted. Gross domestic product (GDP) declined for five of six quarters
beginning in the first quarter of 2008, and the economy lost more than 8 million
jobs between 2008 and 2009, when the unemployment rate reached 10%. In late
2009 and early 2010, there were signs that a gradual economic recovery had
begun.

REGULATION OF INSTITUTIONS AND FINANCIAL MARKETS

In modern economies when financial institutions are in crisis, to avoid these types
of problems, governments normally regulate financial institutions and markets as
much or more than any other sector of the economy.

Regulations That Regulate Financial Institutions

The United States Congress passed the Glass-
Steagall Act in 1933 during the height of the
Great Depression. The early 1930s saw a series
of panicked bank runs, causing nearly a third of
the nation's banks to fail. Problems within the
banking sector and other factors contributed to
the worst economic contraction in American
history, in which industrial production fell more
than 50%, the unemployment rate reached
almost 25%, and commodity prices shares
plunged approximately 86%. The Glass-Steagall Act attempted to allay public fear
of the banking industry by creating the Federal Deposit Insurance Corporation
(FDIC), which provided security for deposits, effectively guaranteeing that
individuals would not lose their money if They kept him in a bank that failed. The
FDIC was also responsible for regularly supervising banks to ensure they were
“safe and sound.” The Glass-Steagall Act also prohibited institutions from
accepting deposits for the purpose of using them in securities financing and trading
activities; In this way, commercial banks were effectively separated from
investment banking.
Over time, financial institutions in the United States faced competitive pressures
from domestic and foreign firms dedicated to facilitating loans or making them
directly. Because these competitors did not accept deposits or were located
outside the United States, they were not subject to the same regulations as
national banks. As a result, American banks began to lose market share in their
core businesses. There was pressure to repeal the Glass-Steagall Act to make it
easier for U.S. banks to compete more effectively, and in 1999 Congress passed
and President Clinton signed the Gramm-Leach-Bliley Act, which allows
commercial banks, investment banks and insurance companies merge and
compete in a broader range of activities.
At the end of the financial crisis and recession, Congress passed the Dodd-Frank
Wall Street Reform and Consumer Protection Act in July 2010. In print, the new
law runs to hundreds of pages and establishes the creation of several agencies,
including the Financial Stability Oversight Board, the Bureau of Financial
Investigation, and the Consumer Financial Protection Bureau. The law also
modifies the responsibilities of several existing agencies and requires new and old
agencies to report to Congress regularly.

Regulations That Regulate Financial Markets

Two other legislative packages were passed during the Great Depression that had
an enormous effect on the regulation of financial markets. The Securities Act of
1933 imposed new regulations on the sale of new securities. The law was
designed to ensure that sellers of new securities provided extensive information to
potential buyers of the securities.
The Securities Exchange Act of 1934 regulates secondary trading in securities
such as stocks and bonds. The Securities Exchange Act of 1934 also created the
Securities and Exchange Commission (SEC), which is the primary agency
responsible for enforcing federal securities laws. Companies must file a 10-Q filing
quarterly and a 10-K filing annually. The 10-Q and 10-K forms contain detailed
information about the firm's financial performance during the period.

BUSINESS TAXES
Taxes are a fact of life, and businesses, like individuals, must pay income taxes.
Income from sole proprietorships and partnerships is taxed as the income of sole
proprietors; Corporate income is subject to corporate taxes.
Regardless of their legal formation, all companies can have two types of income:
  Ordinary
 Capital gains.

According to current legislation, these two types of income receive different

treatment in the taxation of individuals.

ORDINARY INCOME

Income obtained through the sale of a company's goods or services.

Example:
Webster Manufacturing, Inc., a small kitchen knife manufacturer, reported pretax
profits of $250,000. The tax on these profits is calculated using the tax rate
schedule in the table:
Total Tax Owed
= $22,250 + (0.39 * ($250,000 - $100,000))
= $22,250 + (0.39 * $150,000)
= $22,250 + $58,500 = $80,750
From a financial point of view, it is important to understand the difference between
the average tax rate and the marginal tax rate, the treatment of interest and
dividend income, and the effects of the tax deduction

 The marginal tax rate represents the rate at which additional income above
the base income level is taxed.

Under the current corporate tax structure in the United States, the marginal tax rate
on income up to $50,000 is 15%. If the business earns more than $50,000 but less
than $75,000, the marginal tax rate is 25%. As the company increases its income,
the marginal tax rate applied changes as shown in table 2.1.
  The average tax rate paid on the company's ordinary income is calculated
by dividing its taxes by its taxable income.

The average tax rate is not equal to the marginal tax rate because rates vary with
income levels. In the example above, Webster Manufacturing's marginal tax rate is
39%, but its average tax rate is 32.3% ($80,750 / $250,000).
In most decisions that business managers make, it is the marginal tax rate that
really matters.

Income from interest and dividends

In the process of determining taxable income, any interest received by the

corporation is included as ordinary income. On the other hand, dividends receive a
different treatment. This different treatment moderates the effect of double taxation,
which occurs when a corporation's profits, already taxed once, are distributed as
dividends to shareholders, who must pay a maximum tax rate of 15% on them.

Tax Deductible Expenses

When calculating their taxes, corporations are allowed to deduct operating
expenses and interest expenses. Tax deduction for these expenses reduces their
after-tax cost. If a company experiences a net loss in a given year, its tax liability is
zero.

CAPITAL GAINS
If a company sells a capital asset (for example, shares held as an investment) for
more than its purchase price, the difference between the purchase price and the
sale price is known as capital gain. For corporations, capital gains are added to
ordinary corporate income and taxed at regular corporate rates.
 BIBLIOGRAPHY.

Book:
 Principles of Financial Management by Lawrence J. Gitman - Chad J. Zutter,
twelfth edition.

Websites:
 http://www.uasb.edu.ec/UserFiles/File/pdfs/DOCENTES/CARLOS%20LARREA/
LarreaDolarizacionfinal06.pdf
 http://www.definicionabc.com/economia/crisis-financiera.php
 https://educacionbancaria.wordpress.com/2012/10/26/52/