Question

1. What are the necessary functions of financial markets?
2. Explain the essence of bank capital rules.

Answer 1

Ans:- Main Functions of Financial Markets are given below.

(1) Determining the Price:- Financial markets help in determining the price of Financial instruments through the market forces i.e through demand and supply for both newly issued assets and existing financial instruments.

(2) Mobilization of Funds:- Financial markets help in mobilization of savings from an individual entity or investors and transfer it into productive financial instruments which helps the investors in increasing their money which in turn helps in boosting the economy.

(3) Liquidity:- Financial markets give the opportunity to the investors to buy or sell their financial instruments in the market at any given time and in doing so it helps the investor to convert their financial asset into cash which makes these financial instruments easily liquidable at any given time.

(4) Cost Reduction:- For Trading buyers and sellers both require information about different securities which are being traded in the market and for that, it will require a lot of time, money and effort but financial market provides necessary information to the investors without spending money which helps in overall cost reduction of the market.

(5) Raising Funds:- Firm requires funds for their project and investors require a return on their invested money financial markets provide a platform for both firms and investors and helps them in raising their funds.

(6) Easily accessible:- Financial Markets provide a platform for financial trading and make sure that it is easily accessible to anyone and everyone.

Bank Capital:- Bank Capital is nothing but the difference between the assets and liabilities or in other words it is the bank's net worth or its equity value.

Bank Capital norms or rules:- The central banks of various countries provide guidelines to maintain their bank a certain portion of capital always so that it can combat in financial crisis. The main purpose of Bank capital norms is to safeguard the bank against any disaster and keep the bank solvent in the financial crisis. Therefore the bank capital norms help in combating the banks in financial disaster.

Basel Norms is an international standard given by the Basel Committee on Banking Supervision (BCBS) to help in the financial crisis and fight the bank from being insolvent. It is widely accepted by many countries.