Financial System Stability & Crises PDF

--- 🌍 1. Financial System Stability Original: A stable financial system creates a favorable environment for depositors and investors, encourages financial institutions and markets to function effectively and efficiently, and promotes investment and economic growth. Explanation: Financial system stability means that the entire financial system (banks, markets, etc.) is strong and can handle big problems without breaking down. It keeps the economy running smoothly by making sure banks and investors feel safe to keep their money moving. 🌪️ 2. Financial System Instability Original: Characteristics of financial instability include failures of systemically important financial institutions, sharp asset price volatility, drain of market liquidity, disruption to payment and settlement systems, and loss of confidence. Explanation: When the financial system is unstable, important banks or companies might fail, prices of things like stocks may change wildly, there might not be enough money in the market, and people could lose trust in the system. 🛠️ 3. Ensuring Financial Stability Original: Ways to maintain financial stability include improving risk management, regulating and supervising banks, implementing financial sector reforms, and improving corporate governance. Explanation: To keep the system safe, governments and banks: 1. Make sure banks can handle risks properly. 2. Regulate banks to ensure they follow rules. 3. Change financial laws if necessary. 4. Ensure companies are managed well (good governance). ⚠️ 4. Financial Crisis Original: A financial crisis is a situation where financial assets suddenly lose a large part of their nominal value. Explanation: A financial crisis happens when the value of financial items (like stocks) drops suddenly. It can disrupt markets and lead to severe economic downturns, causing people to lose money and businesses to stop growing. 💣 5. Causes and Consequences of Financial Crises 1. Original: Leverage means borrowing to finance investments, and uncontrolled debt levels can lead to credit downgrades. Explanation: Leverage is when a company or person borrows money to make investments, which is risky if the debt becomes too big. 2. Original: High credit growth can lead to an increase in property prices followed by a collapse. Explanation: When too much money is loaned out, it can make prices of houses or assets go up, then suddenly crash. 3. Original: Asset-Liability Mismatch occurs when risks associated with an institution's debts and assets are not appropriately aligned. Explanation: This happens when what a bank owes (liabilities) doesn't match what it owns (assets), which can cause big problems. 4. Original: Regulatory failures occur when financial crises happen due to insufficient regulation. Explanation: Weak or missing rules allow companies to take big risks that can lead to a crisis. 5. Original: Weak management refers to issues in governance and risk management. Explanation: Poor leadership and bad decisions inside financial institutions can make a crisis worse. 🏦 6. Types of Financial Crises Original: Banking crisis occurs when a bank suffers a sudden rush of withdrawals by depositors (bank run). Explanation: In a banking crisis, too many people try to take their money out at once, which causes the bank to run out of cash. Original: Speculative bubbles refer to the large, sustained overpricing of some class of assets. Explanation: A bubble happens when people keep buying things (like houses or stocks) thinking their prices will keep rising, but eventually, prices crash when everyone tries to sell. Original: Currency crisis occurs when a country is forced to devalue its currency due to a lack of foreign currency liquidity. Explanation: In a currency crisis, a country runs out of foreign currency and has to lower the value of its own money, which can hurt the economy. Original: Sovereign debt crisis is when a country fails to pay back its sovereign debt. Explanation: In a sovereign debt crisis, a country cannot pay back the money it owes to other countries or institutions. 🌍 7. Major Financial Crises Original: Examples of major financial crises include the Wall Street Crash (1929), Oil Crisis (1973), Latin American Debt Crisis (1980s), Japanese Asset Price Bubble (1990), Asian Financial Crisis (1997), Russian Financial Crisis (1998), and the Global Financial Crisis (2007-08). Explanation: These events are some of the worst financial crises in history, where markets crashed, and economies suffered globally. 🌍 8. Global Financial Crisis (GFC) of 2007-08 Original: The Global Financial Crisis (GFC) started in 2007-2008, the worst financial crisis since the Great Depression. Explanation: This crisis was triggered by a combination of easier loans for borrowers, overvalued mortgages, and the collapse of the housing market. It led to a global recession, with big banks and markets collapsing. 🌍 9. European Debt Crisis Original: The European debt crisis took place in some eurozone member states since the end of 2009. Explanation: Some countries in Europe (like Greece) borrowed too much money and couldn't pay it back, leading to a crisis where the European Central Bank and other organizations had to step in. 🌍 10. COVID-19 Pandemic Original: The COVID-19 pandemic has significantly impacted global financial markets. Explanation: COVID-19 slowed down economies worldwide, forcing governments to make borrowing easier by lowering interest rates. After the pandemic, they had to raise the rates back again to control inflation. 🛡️ 11. Financial System Safety Net (FSSN) Original: The FSSN safeguards financial system stability so that the financial sector can operate normally and contribute to sustainable economic development. Explanation: The Financial System Safety Net (FSSN) makes sure that banks and financial companies are safe and can survive problems. It includes rules like deposit insurance and emergency plans. Key Components: 1. Bank regulation: Ensures that banks follow the rules. 2. Capital funds: Extra money that banks keep in case they run into trouble. 3. Lender of Last Resort: Central banks give money to banks when they run out. 🔒 12. Regulation and Financial Safety System (FSS) Original: Regulation safeguards the interest of deposit holders, ensures financial system stability, facilitates risk management, and promotes good governance. Explanation: Governments regulate banks to make sure they manage their risks well, treat customers fairly, and don't take dangerous risks that could lead to crises. 📏 13. Regulation Types 1. Original: Micro-Prudential Regulation regulates individual financial institutions to maintain financial system stability. Explanation: This type of regulation focuses on making sure each bank or financial institution stays safe. 2. Original: Macro-Prudential Regulation is aimed at mitigating the risk of the financial system as a whole. Explanation: This type of regulation looks at the bigger picture, making sure the whole financial system stays stable. 💰 14. Capital Funds and Basel Accords Original: Basel Accords set international standards for how much capital banks need to keep to stay safe. Explanation: Capital funds are the money banks keep aside to protect themselves from losses. The Basel Accords are global rules that decide how much of this extra money banks need to have, depending on how risky their operations are. 🛠️ 15. Lender of Last Resort (LOLR) Original: The central bank acts as a lender of last resort by providing loans to banks or institutions experiencing financial difficulty. Explanation: If a bank runs out of money, the central bank steps in to give it a loan so the bank doesn’t collapse and cause bigger problems. 🛡️ 16. Deposit Insurance and Liquidity Support Scheme Original: Insurance of deposits is a well-accepted safety net measure that will protect and promote public confidence in the banking system. Explanation: Deposit insurance protects people’s savings in the bank, so if a bank fails, people can still get their money back up to a certain limit. 📊 17. Financial Ratios Original: Ratios like Capital Adequacy Ratio (CAR) and Liquidity Ratio help assess the stability of a bank. Explanation: These ratios are tools to check how safe a bank is. For example, the Capital Adequacy Ratio shows how much extra money a bank has to deal with any unexpected problems. 🧑‍🏫 18. Awareness and Education Original: Awareness is a key component of financial system stability. CBSL conducts awareness campaigns based on various approaches. Explanation: It’s important for people to understand how the financial system works. The Central Bank of Sri Lanka (CBSL) runs educational campaigns to inform the public about risks, financial scams, and how to keep their money safe. --- 🔍 19. Credit Rating Original: A credit rating is an evaluation of the credit risk of a prospective debtor (an individual, corporate, sovereign). Explanation: A credit rating is a score given to a person, company, or country that shows how likely they are to pay back a loan. This helps lenders (like banks) decide if they want to give money or not. If the rating is high, it means they are more likely to pay back the loan. Key Points: 1. Rating agencies provide these evaluations based on both quantitative (numbers, data) and qualitative (other factors like management quality or political stability) information. 2. Investors and lenders use these ratings to decide where to put their money. 🏦 20. Credit Information and Evaluation Original: Five Cs Model for Credit Evaluations. Explanation: To decide whether someone or a company should get a loan, banks often use the Five Cs of Credit, which include: 1. Character: Can they be trusted to repay the loan? 2. Capacity: Do they have enough money or income to make the payments? 3. Capital: Do they have any assets or money saved up in case of trouble? 4. Collateral: What can they offer as security if they can’t pay back the loan? 5. Conditions: What are the economic conditions like (interest rates, inflation, etc.)? --- 💼 21. Key Types of Financial Crises 💥 1. Banking Crisis Original: A banking crisis occurs when a bank suffers a sudden rush of withdrawals by depositors (bank run). Explanation: In a banking crisis, people panic and all try to take their money out of the bank at the same time. This causes the bank to run out of money (because banks don't keep all the money they owe depositors in cash). If enough people do this, the bank can collapse. A famous example of a bank run was Northern Rock in 2007. 📈 2. Speculative Bubbles and Crashes Original: A speculative bubble exists when there is a large, sustained overpricing of some class of assets. Explanation: A speculative bubble happens when the price of something (like houses or stocks) keeps rising, not because the item is really worth more, but because people keep buying it in hopes the price will keep going up. Eventually, the bubble bursts, and prices drop fast, causing people to lose money. Examples include the Wall Street Crash of 1929 and the Dot-com bubble in the early 2000s. 💸 3. Currency Crises Original: A currency crisis happens when a foreign exchange market triggers from a lack of foreign currency liquidity. Explanation: A currency crisis occurs when a country doesn't have enough foreign currency to meet its needs. This forces it to devalue its own money, making things more expensive for everyone. An example of this is Mexico’s peso devaluation in 1994-95. 🇬🇷 4. Sovereign Defaults Original: A sovereign default is when a country fails to pay back its sovereign debt. Explanation: Sovereign default happens when a government borrows too much money and can’t pay it back. This can lead to a loss of confidence in the country's economy, causing investors to pull out their money. One major example is the Greek debt crisis in 2012. 📉 5. Wider Economic Crises: Recession and Depression Original: An economic crisis occurs when there is negative GDP growth lasting two or more quarters, called a recession. Explanation: When the economy shrinks for six months or more, it's called a recession. If the recession is very severe and lasts for years, it's called a depression. An example of a depression is the Great Depression of the 1930s, which affected many countries and led to widespread unemployment and poverty. --- 📚 22. Key Historical Crises 📉 Wall Street Crash of 1929 Original: The Wall Street Crash of 1929 (Black Tuesday) began in late October 1929. Explanation: This crash led to the Great Depression, one of the worst economic downturns in history. On Black Tuesday, stock prices plummeted, causing many investors to lose their savings and triggering a 10-year economic depression. 💥 Oil Crisis and Stock Market Crash of 1973 Original: The oil crisis began in October 1973 when the members of the Organization of Arab Petroleum Exporting Countries (OAPEC) proclaimed an oil embargo. Explanation: In 1973, several Arab countries stopped selling oil to nations that supported Israel, causing the price of oil to skyrocket. This sudden price increase caused stock markets around the world to crash. 💸 Latin American Debt Crisis of the 1980s Original: The Latin American debt crisis originated when Latin American countries reached a point where their foreign debt exceeded their income. Explanation: During the 1980s, many countries in Latin America borrowed a lot of money from foreign countries. When they couldn't pay it back, they experienced a debt crisis. In 1982, Mexico was the first to declare it could not meet its debt payments, leading to a wave of defaults across the region. 📉 Japanese Asset Price Bubble of 1990 Original: Real estate and stock market prices were highly inflated. Explanation: In the late 1980s, the price of land and stocks in Japan shot up rapidly, creating a bubble. By 1990, the bubble burst, leading to a decade of economic stagnation and a large number of bad loans (non-performing assets) for Japanese banks. --- 💸 Asian Financial Crisis of 1997 Original: The crisis started in Thailand with the financial collapse of the Thai baht. The Thai government was forced to float the baht due to a lack of foreign currency to support its fixed exchange rate. Explanation: In 1997, Thailand's economy collapsed because it didn't have enough foreign currency to keep its money, the baht, stable. As a result, they had to float the baht, meaning they let its value be decided by the market. This caused a chain reaction in nearby countries like South Korea and Indonesia, leading to a widespread economic crisis in Asia, where currencies, stock markets, and prices of assets fell drastically. 🇷🇺 Russian Financial Crisis of 1998 Original: The Russian financial crisis (Ruble crisis) resulted due to the Russian government and the Russian Central Bank devaluing the ruble and defaulting on its debt. Explanation: In 1998, Russia experienced a financial crisis due to a combination of low productivity, a fixed exchange rate, and a massive fiscal deficit. The government had to devalue its currency, the ruble, and couldn’t pay back the money it had borrowed (defaulted on its debt). This led to severe economic problems within Russia. --- 🔧 23. Financial Safety Measures and Practices 🏦 Lender of Last Resort (LOLR) Original: The central bank provides loans to banks or other financial institutions experiencing financial difficulty. Explanation: When a bank is in financial trouble and can't get enough money, the central bank (such as the Central Bank of Sri Lanka or other national banks) steps in to help them. This prevents banks from collapsing and keeps the financial system stable. If even the central bank can't help, institutions like the International Monetary Fund (IMF) may step in as a last resort. 💼 Deposit Insurance and Liquidity Support Scheme Original: Licensed banks and licensed finance companies must insure their deposit liabilities in the Sri Lanka Deposit Insurance and Liquidity Support Scheme (SLDILSS), which is operated by the Monetary Board of CBSL. Explanation: Deposit insurance protects people's money if a bank fails. In Sri Lanka, banks are required to have this insurance, so if a bank goes bankrupt, people will still get back some or all of their money (up to Rs. 1,100,000 per depositor). --- 📊 24. Key Financial Ratios for Stability Original: The Capital Adequacy Ratio (CAR) is measured by determining the amount of capital available after regulatory adjustments as a percentage of total risk-weighted assets. Explanation: Financial ratios are important because they help check how safe a bank is. For example, the Capital Adequacy Ratio (CAR) shows how much extra money a bank has to handle risks. It’s like a safety cushion, making sure the bank has enough money to deal with any problems. Other key ratios include: 1. Tier 1 Capital Ratio: This measures the ratio of core capital (the most secure form of capital, like money from ordinary shares) to risk-weighted assets (how risky a bank's investments are). 2. Liquidity Coverage Ratio (LCR): This is the ratio of liquid assets (things that can be quickly sold for cash) to short-term obligations. It shows if a bank can handle a sudden need for cash. 3. Leverage Ratio: This measures how much debt a bank has compared to its capital. It helps assess whether the bank can pay off its debts. --- 📚 25. Raising Awareness for Financial Stability Original: Awareness is a key component of financial system stability. CBSL continues to conduct awareness campaigns based on various approaches. Explanation: Educating people about financial stability is critical to prevent crises. The Central Bank of Sri Lanka (CBSL) runs programs to make people aware of financial scams (like pyramid schemes or online scams) and unauthorized financial activities. This ensures people know how to protect their money and understand how the financial system works. --- 🏦 26. Credit Rating Agencies and Ratings Original: A credit rating is an evaluation of the credit risk of a prospective debtor (an individual, corporate, or sovereign). Rating agencies provide a numeric evaluation of creditworthiness. Explanation: Credit rating agencies evaluate how risky it is to lend money to a person, company, or even a country. They provide scores (like AAA, BBB, etc.) that show how likely the borrower is to pay back the loan. If a person or company has a high credit rating, it means they are considered safe to lend to, while a lower score means there’s more risk. --- 📝 27. Conclusion and Final Notes The financial system is a complex web of banks, markets, and institutions that require strong safety measures and regulations to ensure stability. Financial crises can happen due to various reasons, such as bad risk management, weak regulations, or economic shocks, and they have widespread consequences on economies and societies. Safety nets, like deposit insurance and lender of last resort mechanisms, are crucial to maintain stability and prevent a complete breakdown of the system during crises. Educating people about financial stability and risk management is key to protecting individuals, businesses, and the overall economy from future crises. 1. Negotiable Instruments Original Text: A negotiable instrument is a signed document that promises a payment to a specified person or assignee. Transferable, which allows the recipient to take the funds as cash, then use them as preferred. Refers to cheques, drafts, bills of exchange, and some types of promissory notes. Safest modes of payment as they contain the name of the issuer and the name of the recipient on them. Simplified Explanation: A negotiable instrument is like a piece of paper that says, "I promise to pay this much money." It can be used as proof that someone owes you money. It could be paid right away or at a later time. Examples: Cheques: Orders to pay a certain amount from your bank account. Bills of Exchange: Instructions for one person to pay money to another. Promissory Notes: Written promises to pay a specific amount at a future date. These are some of the safest ways to transfer money because both the payer’s and recipient’s names are on the document. --- 2. Bill of Exchange Original Text: A bill of exchange is a negotiable and unconditional written order. An order made by one person to another to pay money to a third person. Requires three parties—drawee (party that pays the sum), payee (person who receives the money), and drawer (person who obliges the drawee to pay the payee). Used in international trade to help importers and exporters fulfill transactions. Simplified Explanation: A bill of exchange is like a command for one person to give money to another. It has three people involved: 1. The drawer: The person who says, "Pay this money." 2. The drawee: The person who has to pay the money. 3. The payee: The person who will receive the money. Often used in international trade to safely transfer payments across borders. --- 3. Bank Note Original Text: A banknote is a type of negotiable instrument known as a promissory note, made by a bank, payable to the bearer on demand. Originally issued by commercial banks, who were legally required to redeem the notes for legal tender (usually gold or silver coin) when presented to the cashier of the originating bank. Commercial banknotes have primarily been replaced by national banknotes issued by central banks. Simplified Explanation: A banknote is a piece of paper money issued by a bank that promises to pay the person holding it. In the past, banknotes could be exchanged for gold or silver, but today they are just backed by trust in the central bank. Modern banknotes, like the cash we use today, are issued by central banks (like the U.S. Federal Reserve or the Central Bank of Sri Lanka) instead of private banks. --- 4. Cheques Original Text: Cheques are the most common form of negotiable instrument. They offer convenience, safety, and a record of transactions. Types of Cheques: Bearer Cheque: Payable as cash to anyone holding the cheque. Order Cheque: Payable only to the specified payee. Uncrossed/Open Cheque: Can be cashed over the bank counter. Simplified Explanation: A cheque is a written order to a bank to pay a specific amount of money to someone. It is the most common way to make payments without using cash. Types of Cheques: Bearer Cheque: Anyone holding the cheque can cash it. Order Cheque: Only the person whose name is written on the cheque can cash it. Uncrossed/Open Cheque: Can be cashed at the bank by presenting it at the counter. --- 5. Crossed Cheques and Endorsements Original Text: Crossed Cheques: General Crossing: Only paid into a bank account. Account Payee Only: Can only be paid into the payee’s account. Endorsements: Endorsement in Blank: Endorser signs their name only, making the cheque payable to whoever holds it. Endorsement in Full: The endorser writes who should be paid and signs. Conditional Endorsement: Payment depends on a specific condition being met. Restrictive Endorsement: Limits how the cheque can be used (e.g., "A/c Payee Only"). Sans Recourse Endorsement: Endorser excludes their own liability if the cheque bounces. Simplified Explanation: A crossed cheque is safer because it must be deposited into a bank account, not cashed directly over the counter. Endorsements are notes or signatures written on the back of a cheque to transfer it to another person or set conditions for how it should be cashed: Blank Endorsement: Anyone can cash it once it’s signed. Full Endorsement: Only the person named in the endorsement can cash it. Conditional Endorsement: Only cashed if a condition is met (e.g., after delivery of goods). Restrictive Endorsement: Limits how it can be used (e.g., can only be deposited into a specific account). --- 6. Promissory Notes and Drafts Original Text: A promissory note is a written promise to pay a sum of money at a fixed or determinable future time to a specified individual. A draft is a three-party instrument similar to a cheque. The drawer signs an order instructing the drawee to pay the payee the amount on the draft. Simplified Explanation: A promissory note is a written document where one person promises to pay another person a certain amount of money at a future time. It involves only two parties: the person who promises to pay and the person who receives the money. A draft is similar to a cheque but involves three parties: 1. The drawer (who writes the draft), 2. The drawee (who will pay), and 3. The payee (who receives the money). The payment can be made immediately or at a set future date. --- 7. Payment Systems Original Text: A payer’s transfer of money directly to a payee. Payment System: A set of instruments, banking procedures, and interbank fund transfer systems that circulate money. Settlement: Discharge of obligations between two or more parties, ensuring the finality of the transaction. Settlement System: Facilitates the settlement process. Simplified Explanation: A payment system is the network that moves money from one person to another, using tools like cheques, electronic transfers, and cash. Settlement is the process that happens after a payment, making sure everything is finalized, and all obligations are cleared. --- 8. Payment and Settlement Systems (PSSs) Original Text: A Payment and Settlement System (PSS) is a combination of payment procedures and settlement arrangements. PSS enables the transfer of money and financial instruments and facilitates the confirmation, clearance, and settlement of transactions. Simplified Explanation: A Payment and Settlement System (PSS) is the infrastructure that allows money and financial assets (like stocks) to be transferred securely between people or institutions. It ensures that money is transferred correctly and all obligations are settled after a transaction. --- 9. Importance of PSSs Original Text: A sound and stable national payment system fosters financial system stability by ensuring the efficient flow of funds among financial institutions. It is necessary for the efficient implementation of monetary policies. PSS protects against risks (systemic, operational, and legal) and improves market governance. Simplified Explanation: A good payment and settlement system is essential for a country’s economy. It allows money to flow smoothly between banks and businesses, supports government monetary policies, and protects against financial risks. Without a stable PSS, the economy could face issues like payment delays or failures. --- 10. Payment Instruments Original Text: Payment Instruments are tools or procedures used to transfer money. They are classified as: Cash Payments Non-cash Payments: Paper-based (e.g., cheques) Electronic Instruments (e.g., bank transfers) Simplified Explanation: Payment instruments are the methods or tools we use to move money, like cash, cheques, or electronic transfers. Non-cash payments can be further divided into paper-based instruments (like cheques) and electronic methods (like online transfers). --- 11. Trends in Payment Instruments Original Text: There is a shift away from cash toward non-cash payment methods (e.g., payment cards). New payment methods are emerging, such as mobile phones and remote transactions. Simplified Explanation: More people are moving away from using cash and instead using non-cash payment methods like credit cards and mobile payments. New technology is making it easier to pay for things without being physically present, like paying online. --- 12. Payment Chain Original Text: Gross Settlements: Transactions are handled and settled one by one. Net Settlements: The bank handles and settles all transactions at the end of the day, grouping them together. Simplified Explanation: In gross settlements, each payment is processed individually, so the money moves right away. This is used for big payments, like in real-time systems. In net settlements, all payments between two parties are grouped together and settled at the end of the day. For example, if a bank owes another bank multiple payments, they just exchange the final difference at the end of the day. --- 13. Most Common Non-Cash Payment Instruments Original Text: Credit Transfers Direct Debits Cheques Bank Drafts Payment Cards: Debit Cards, Credit Cards, Charge Cards, Prepaid Cards Online and Mobile Payments Simplified Explanation: There are different ways to make non-cash payments: Credit Transfers: Moving money from one bank account to another. Direct Debits: Allowing a company or organization to take money directly from your account for things like bills. Cheques: A written order to a bank to pay someone. Bank Drafts: A cheque guaranteed by the bank. Payment Cards: Debit, credit, or prepaid cards that let you make payments without using cash. Online and Mobile Payments: Paying for things using apps or websites. --- 14. Credit Cards Original Text: A credit card is a payment card that allows the cardholder to borrow money to pay for goods and services, with the promise to pay it back plus any additional charges. Simplified Explanation: A credit card lets you buy things now and pay for them later. You borrow the money from the bank and must pay it back, often with extra charges (like interest) if you don’t pay it all back right away. It’s a convenient way to buy things without carrying cash. --- 15. Credit Card Process Original Text: Acquirer: The bank that processes credit or debit card payments on behalf of a merchant. Issuer: The bank or financial institution that gives credit cards to customers. Merchant: The business that accepts card payments. Simplified Explanation: When you pay with a credit card: The acquirer is the bank that handles the payment for the store or merchant. The issuer is the bank that gave you the credit card. The merchant is the business that you are paying. --- 16. Debit Cards Original Text: A debit card is a plastic card that provides an alternative payment method to cash. It allows instant withdrawal of cash, acting like an electronic cheque. Simplified Explanation: A debit card lets you pay for things directly from your bank account, so when you make a purchase, the money is taken out of your account immediately. It can also be used to take out cash from an ATM. It's like a digital version of using cash or a cheque. --- 17. POS Machine Original Text: A Point of Sale (POS) machine processes credit or debit card transactions at the checkout. Simplified Explanation: A POS machine is the device used at stores where you swipe your card to make a payment. It handles the process of moving money from your account to the store's account. --- 18. Kiosks Original Text: A kiosk is a small, temporary, stand-alone booth used in high-traffic areas for marketing purposes. Simplified Explanation: A kiosk is a small stand or booth, often in malls or other busy places, where businesses can sell things or promote their services. It’s a convenient way to attract customers in places with a lot of people. --- 19. Cash Recycle Machine Original Text: A Cash Recycle Machine handles tasks of accepting and dispensing cash for deposits and withdrawals to bank accounts. Simplified Explanation: A cash recycle machine is an advanced ATM that can both give you cash and accept cash deposits, so you don’t need to go inside the bank. It speeds up banking and eliminates paperwork for simple transactions like deposits. --- 20. Mobile (M) Banking Original Text: Mobile banking (M-banking) is used for balance checks, account transactions, and payments via a mobile device like a phone. Mobile banking consists of: Mobile Accounting Mobile Brokerage Mobile Financial Information Services Simplified Explanation: Mobile banking lets you do banking using your phone. You can check your account, move money, or pay bills from anywhere. There are three types of services offered: Mobile Accounting: Managing your bank account using your phone. Mobile Brokerage: Using your phone to trade stocks and other investments. Mobile Financial Information: Getting updates and information about your bank account or the financial market through your phone. --- 21. Mobile Wallet Original Text: A mobile wallet allows a consumer to pay for services or goods using their phone. Primary models for mobile payments include: Mobile wallets Card-based payments Carrier billing Contactless payments (NFC) Simplified Explanation: A mobile wallet stores your payment information digitally, so you can use your phone to pay for things instead of carrying cash or cards. It supports different payment methods like: Card-based payments: Using your saved card information. Carrier billing: Adding the payment to your phone bill. Contactless payments: Using technologies like NFC (Near Field Communication) to tap and pay with your phone. --- 22. E-Money Original Text: E-money is money stored electronically on a stored-value card or online account. Simplified Explanation: E-money is digital money that you can store in prepaid cards or online accounts. It's not physical money but can be used to make payments just like cash. Examples include PayPal balances or prepaid gift cards. --- 23. QR Code Payments Original Text: QR code payment is a contactless payment method where payment is made by scanning a QR code using a mobile app. Simplified Explanation: A QR code payment allows you to pay for goods or services by scanning a barcode with your phone. It’s a fast and contactless way to make payments without needing to swipe a card or use cash. --- 24. Digital Currency Original Text: Digital currency is distinct from physical money (like banknotes or coins). It allows for instantaneous transactions and borderless transfer of ownership. Simplified Explanation: Digital currency is money that exists only online and doesn’t have a physical form like cash. It allows you to send and receive money quickly from anywhere in the world, without needing banks or physical exchanges. --- 25. Cryptocurrency Original Text: Cryptocurrency is a digital currency that uses encryption techniques to control transactions and verify the transfer of funds. Simplified Explanation: Cryptocurrency is a type of digital money, like Bitcoin, that uses secure technology to ensure safe transactions. It operates independently of banks and governments, using encryption to keep transactions secure. --- 26. Blockchain Original Text: A blockchain is a public ledger of all cryptocurrency transactions. Simplified Explanation: Blockchain is like a digital record book that keeps track of every transaction made using cryptocurrencies like Bitcoin. Once a transaction is added to the blockchain, it can’t be changed, which makes it very secure. --- 27. FinTech (Financial Technology) Original Text: FinTech is the new technology and innovation aimed at competing with traditional financial methods. Includes cryptocurrency, blockchain technology, smart contracts, and robo-advisors. Simplified Explanation: FinTech stands for financial technology, and it refers to new tools and innovations that are transforming how financial services work. This includes things like mobile payment apps, digital wallets, cryptocurrency, and automated investment tools. --- 28. Financial Market Infrastructure (FMI) Original Text: FMI is a multilateral system among financial institutions used for recording, clearing, or settling payments and financial transactions. Simplified Explanation: Financial Market Infrastructure (FMI) is the system that makes sure money and assets (like stocks and bonds) move smoothly between financial institutions. It handles everything from payments to the settlement of trades. --- 29. Major Payment Systems in Sri Lanka Original Text: Large Value Payment Systems: RTGS System. Retail Value Payment Systems: Systems operated by LankaPay. Securities Settlement Systems (SSSs): LankaSecure System. Foreign Exchange Settlement Systems: Treasury Management System (for managing foreign reserves and transactions). Simplified Explanation: In Sri Lanka, there are different types of payment systems: Large Value Payment Systems (RTGS): Used for big, important transactions, where money is transferred in real-time. Retail Value Payment Systems (LankaPay): Used for smaller, everyday transactions like paying bills or shopping. Securities Settlement Systems (LankaSecure): Used for settling trades of financial securities (like bonds). Foreign Exchange Settlement Systems: Manages foreign currency transactions, ensuring smooth international money transfers. --- 30. Real Time Gross Settlement (RTGS) Original Text: RTGS System is an electronic fund settlement system that processes and settles each payment individually and irrevocably in real-time. Helps minimize settlement risk in high-value electronic payments. Settles on a gross basis, meaning payments aren’t grouped with other transactions. Simplified Explanation: RTGS is a system used for transferring large sums of money instantly. Each transaction is processed one at a time (not combined with others), and once the money is sent, it can't be taken back. This makes it fast and secure, ideal for important payments like bank transfers or large business deals. --- 31. LankaSettle System Original Text: LankaSettle System has two components: 1. Inter-Participant Settlement System: Transfers and settles funds between banks using RTGS. 2. LankaSecure System: A securities settlement system that records ownership of government securities in an electronic format (scripless).** Simplified Explanation: The LankaSettle system in Sri Lanka manages two main functions: 1. Inter-Participant Settlement System: This is where money is transferred and settled between banks using the RTGS system for real-time processing. 2. LankaSecure System: This system keeps track of the ownership of government bonds and securities electronically, meaning there is no need for paper certificates (also known as scripless securities). --- 32. Scripless Securities Settlement System (SSSS) Original Text: Scripless Securities are represented as an account entry in a central depository, instead of using paper certificates. The system improves efficiency in the government debt securities market and eliminates the risks associated with paper securities (loss, damage, delay). Simplified Explanation: Scripless securities are financial assets like bonds that are recorded electronically, so no paper certificate is needed. This makes trading faster, safer, and avoids problems like loss or damage to paper documents. --- 33. LankaSecure System Original Text: LankaSecure System comprises the Scripless Securities Settlement System (SSSS) and the Scripless Securities Depository System (SSDS). Facilitates the issue of government securities and Central Bank securities in electronic form. Settles trades of these securities on a Delivery vs Payment (DvP) basis. Simplified Explanation: The LankaSecure System is an electronic system that handles both: 1. Scripless Securities Settlement System (SSSS): Manages the buying and selling of government bonds electronically. 2. Scripless Securities Depository System (SSDS): Keeps track of who owns the securities (bonds) without using paper. The system makes sure that both money and securities are exchanged at the same time (known as Delivery vs Payment), making the process safer for everyone involved. --- 34. Sri Lanka Interbank Payment System (SLIPS) Original Text: SLIPS is an online interbank payment and fund transfer system. SLIPS enables member banks to carry out same-day transfers of up to Rs. 5 million, using a paperless process. It is often used for bulk or recurring payments like salaries and utility bills. Simplified Explanation: SLIPS is a system in Sri Lanka that allows banks to transfer money between each other electronically. It’s mostly used for regular or recurring payments like paying employees or utility bills. The system can handle transfers up to Rs. 5 million and completes them on the same day. --- 35. Cheque Imaging & Truncation System (CITS) Original Text: CITS was introduced in 2006 to clear cheques based on images of cheques, reducing the cheque realization time to T+1 (next business day). Operator: LankaClear (Pvt) Ltd. Simplified Explanation: The Cheque Imaging & Truncation System (CITS) speeds up the process of clearing cheques by using digital images instead of the physical cheque itself. This reduces the time it takes for a cheque to clear, so the money is available the next business day. --- 36. National Card Scheme in Sri Lanka Original Text: The National Card Scheme (NCS) was launched in 2019 by CBSL and LankaClear. NCS cards will be accepted across over 4,800 ATMs island-wide, connected to the LankaPay network. The “LankaPay 2in1” card will be introduced as a chip-based NFC card for payments, including public transport. Simplified Explanation: Sri Lanka’s National Card Scheme (NCS) allows people to use payment cards across the country at more than 4,800 ATMs. The LankaPay 2in1 card will be a contactless card (using NFC technology) that allows people to make payments, including paying for public transportation, without using cash. --- 37. Common Card and Payment Switch (CCAPS) Original Text: CCAPS was established to create a unified platform for electronic retail payments and achieve cost efficiency and customer convenience. All licensed banks in Sri Lanka should join the networks under CCAPS, such as CAS, CEFTS, CPS, and CMobS. Simplified Explanation: The Common Card and Payment Switch (CCAPS) is a unified platform for handling all types of electronic payments, making it easier and cheaper for both banks and customers. Banks are encouraged to join this network to offer services like CAS (Common ATM Switch), CEFTS (Common Electronic Fund Transfer Switch), and others. --- 38. Common ATM Switch (CAS) Original Text: CAS is an interbank ATM network that allows participating banks to use each other’s ATMs. The final settlement of CAS transactions is processed in the RTGS system. Simplified Explanation: The Common ATM Switch (CAS) allows customers from different banks to use each other's ATMs, giving them more convenience. All transactions done through this network are settled using the RTGS system. --- 39. Common Electronic Fund Transfer Switch (CEFTS) Original Text: CEFTS is a fully automated, paperless fund transfer system that allows instant fund transfers between banks. It can be accessed through multiple payment channels, such as Internet Banking, Mobile Banking, ATM, Kiosks, and over-the-counter services. Simplified Explanation: The Common Electronic Fund Transfer Switch (CEFTS) is a system that allows people to transfer money instantly between banks without using paper. You can use CEFTS through various channels, like mobile banking apps, internet banking, ATMs, or even at the bank counter. --- 40. JustPay and LankaPay Payment Platform (LPOPP) Original Text: JustPay facilitates secure real-time low-value retail payments using mobile apps. LPOPP was introduced to enable customers of licensed commercial banks (LCBs) to make online payments to government and private organizations. Simplified Explanation: JustPay is a service that lets people make small, everyday payments securely in real-time using mobile apps. The LankaPay Payment Platform (LPOPP) allows customers to pay for things online, such as government services or private organizations, using their bank accounts. --- 41. Role of Central Bank of Sri Lanka (CBSL) Original Text: The CBSL is responsible for regulating and supervising payment, clearing, and settlement systems. CBSL owns, operates, and acts as the settlement for the Real-Time Gross Settlement (RTGS) system. CBSL is responsible for promoting electronic retail payment systems (E-RPS) to move toward a less-cash society. Simplified Explanation: The Central Bank of Sri Lanka (CBSL) manages and oversees the country’s payment systems to ensure they run smoothly. CBSL also promotes the use of electronic retail payment systems (E-RPS) to help Sri Lanka transition to a society that relies less on cash and more on electronic payments. --- 42. Cyber Attacks on Payment Systems Original Text: Cybersecurity breaches affect digital payments, and care should be taken when using digital payment systems. Simplified Explanation: Cyberattacks pose a risk to digital payments, so people and institutions must take precautions to protect themselves when using online and mobile payment systems to avoid fraud or data theft. --- --- 1. Financial Institutions (FIs) Original Text: Financial institutions provide a range of services in relation to: Financial intermediation: Connecting providers of funds with users, creating new financial assets. Exchanging financial assets: Acting as brokers or agents for clients. Creating, buying, and selling financial assets: Underwriting new share issues. Providing investment advice: Offering advice on personal pensions or firm mergers. Carrying out fund management: Managing pensions and other funds. Long Explanation: Financial Institutions are essential organizations in any financial system. They help manage, distribute, and transfer funds and offer various services. The roles of financial institutions include: Financial intermediation: This means they connect people or companies who have extra money (savers) with those who need money (borrowers or businesses). They create new ways for money to be used. Exchanging financial assets: Some financial institutions act like middlemen. They help buy and sell assets, like stocks or bonds, for their clients. Creating, buying, and selling financial assets: Financial institutions help companies raise money by issuing shares (selling pieces of the company to the public). They underwrite these issues, meaning they take responsibility for ensuring these shares are sold. Providing investment advice: Financial institutions also act as advisers. They help individuals or companies make smart investment choices, whether it’s planning for retirement or deciding on a big business merger. Managing funds: Large sums of money, like pension funds, are managed by these institutions. They invest this money carefully to ensure it grows over time. --- 2. Financial Intermediaries Original Text: A financial intermediary is an institution that connects surplus and deficit units in the financial system. Financial intermediaries mainly supply indirect finance. Long Explanation: Financial intermediaries are institutions like banks that play a critical role in the financial system. They act as middlemen between two parties: Surplus units: People or organizations that have extra money, such as savers. Deficit units: People or organizations that need money, such as businesses looking for loans. Instead of directly lending money from a saver to a business, these intermediaries do it for them. This is called indirect finance. For example, a bank might take deposits from savers and use that money to give loans to businesses or individuals who need it. --- 3. Key Roles of Financial Intermediaries Original Text: Maturity transformation: Converting short-term liabilities to long-term assets. Risk transformation: Spreading risk by lending to multiple borrowers. Convenience denomination: Matching small deposits with large loans and large deposits with small loans. Solve asymmetric information problem: Reducing the knowledge gap between the parties involved. Long Explanation: Financial intermediaries help the financial system function smoothly through these important roles: Maturity transformation: This means that banks take short-term deposits (money that people can withdraw at any time) and turn them into long-term loans (like a mortgage). They make sure that even though someone might need their money back soon, the bank can still lend it out for longer periods. Risk transformation: By lending to many different people or businesses, intermediaries reduce the overall risk of losing money. If one loan defaults, the others still bring in money, spreading the risk across many borrowers. Convenience denomination: Banks can pool together small amounts of money from many savers to create a larger loan for someone who needs more money, or the reverse, using large deposits to fund multiple small loans. Solving information problems: In financial transactions, one party often knows more than the other (this is called asymmetric information). Banks and other intermediaries help solve this by evaluating and managing risks for both parties, ensuring that both the lender and borrower are protected. --- 4. Importance of Financial Intermediaries Original Text: Advantages: Cost advantage: Lower costs compared to direct lending/borrowing. Reconciling preferences: Balancing the needs of lenders and borrowers. Risk aversion: Spreading risks across multiple loans. Economies of scale: Reducing the costs of lending and borrowing by operating on a large scale. Economies of scope: Enhancing services by focusing on the specific demands of lenders and borrowers. Long Explanation: Financial intermediaries offer significant advantages to both savers and borrowers: Cost advantage: It’s cheaper for savers to deposit their money in a bank and for borrowers to get loans from that same bank, compared to lending and borrowing directly. Reconciling preferences: Financial intermediaries work to balance what both parties need, ensuring that savers get a good return on their deposits and borrowers get loans at reasonable rates. Risk aversion: By pooling many deposits and spreading loans across multiple borrowers, intermediaries reduce the risk of any one borrower defaulting. Economies of scale: Since financial institutions handle large amounts of money, they can operate more efficiently and offer lower costs to customers. Economies of scope: By concentrating on the needs of both lenders and borrowers, financial institutions can improve their services, like offering better interest rates or more investment opportunities. --- 5. Classification of Financial Intermediaries Original Text: Financial intermediaries fall into three categories: Depository institutions: Banks, savings associations, and credit unions. Contractual savings institutions: Insurance companies, pension funds. Investment intermediaries: Mutual funds, finance companies. Long Explanation: Financial intermediaries can be divided into three main types: Depository institutions: These are places like banks, savings associations, and credit unions, where people deposit their money. These institutions then lend that money out to others who need it. Contractual savings institutions: These include insurance companies and pension funds, where people or companies pay in regular amounts of money (premiums or contributions). These funds are invested and eventually paid out as pensions or insurance benefits. Investment intermediaries: These are institutions like mutual funds and finance companies that invest people’s money in things like stocks and bonds, with the goal of making profits for their clients. --- 6. Primary Assets and Liabilities of Financial Intermediaries Original Text: Primary Liabilities (Sources of Funds): Depository institutions: Deposits from customers. Contractual savings institutions: Premiums or contributions. Investment intermediaries: Shares, stocks, bonds. Primary Assets (Uses of Funds): Depository institutions: Loans, mortgages, government bonds. Contractual savings institutions: Corporate bonds, government securities. Investment intermediaries: Stocks, bonds, money market instruments. Long Explanation: Financial intermediaries work by gathering funds (liabilities) from customers and using those funds to make investments or loans (assets). Depository institutions (like banks) get their money from customer deposits (liabilities) and use it to give out loans, mortgages, or buy government bonds (assets). Contractual savings institutions (like insurance companies and pension funds) get their funds from premiums or employee contributions (liabilities) and invest them in things like corporate bonds or government securities (assets). Investment intermediaries (like mutual funds) collect money by selling shares or bonds (liabilities) and then invest that money in stocks, bonds, or other investments (assets). --- 7. Key Financial Intermediaries Original Text: Banks Finance companies Investment banks Merchant banks Leasing companies Microfinance institutions Credit unions Insurance companies Factoring companies Cooperatives Pension funds Escrow companies Long Explanation: These are the most important types of financial intermediaries: Banks: Accept deposits from customers and give out loans. Finance companies: Provide loans to individuals or businesses, often for things like buying a car or home improvements. Investment banks: Help companies raise money by selling stocks or bonds, and offer advice on big deals like mergers. Merchant banks: Work with smaller companies to help them raise funds by selling shares to a few investors. Leasing companies: Provide businesses or individuals with equipment or vehicles through long-term rental agreements. Microfinance institutions: Provide small loans to people who can’t access traditional banking services. Credit unions: Member-owned institutions that provide banking services to their members, usually at lower costs. Insurance companies: Provide financial protection by selling insurance policies and investing the premiums they collect. Factoring companies: Help businesses manage their cash flow by buying their unpaid invoices at a discount. Cooperatives: Member-owned organizations that offer savings and loan services. **Pension funds Continuing from where we left off, here is the rest of the detailed breakdown of the document. --- 7. Key Financial Intermediaries (Continued) Original Text: Pension funds: These funds manage retirement savings and pay out benefits to retirees. Escrow companies: These companies hold money or assets on behalf of two parties during a transaction until certain conditions are met. Long Explanation: Pension funds: These institutions collect and manage money from employees and employers to save for retirement. Once a person retires, the pension fund pays out a regular income. Escrow companies: These companies act as a neutral third party during financial transactions, like when buying a house. They hold the money until both the buyer and the seller meet all their obligations, ensuring the transaction is safe for both sides. --- 8. Bank Business Model Original Text: Bank revenue comes from: Interest: The difference between what banks charge on loans and what they pay on deposits. Transaction fees: Fees charged for services like transfers or currency exchanges. Financial advice: Fees earned by providing consulting services to customers. Net interest income: The income banks make from their balance sheet activities, such as lending and investing. Long Explanation: Banks make money in several ways: Interest income: The main way banks make money is by charging interest on loans (like mortgages or business loans). At the same time, they pay interest on deposits (like savings accounts), but the interest they charge on loans is higher than what they pay on deposits. This difference is the bank’s profit. Transaction fees: Banks charge fees for services such as money transfers, currency exchanges, or ATM usage. Financial advice: Banks also make money by offering consulting and advisory services, like helping businesses make financial decisions. Net interest income: This is the profit that banks make after subtracting the interest they pay on deposits from the interest they earn from loans. --- 9. Bank Business Activity: On-Balance Sheet Activities Original Text: A bank's balance sheet contains: Assets: These are things the bank owns, like loans, investments, and cash reserves. Liabilities: These are things the bank owes, like customer deposits and borrowings. Net worth: The difference between assets and liabilities, also called equity capital. Banks earn interest on loans and investments, and they pay interest on deposits. Net interest income is the income from these activities (lending and investing). Long Explanation: On-balance sheet activities refer to the actual transactions that appear on the bank’s balance sheet: Assets: These include things like loans the bank has given out, investments the bank has made, and cash reserves it holds. Liabilities: These include customer deposits (the money customers have put into their savings or checking accounts) and any money the bank has borrowed from other financial institutions. Net worth: This is the bank’s total value, calculated as the difference between its assets and liabilities. It's also called equity capital. Banks make money by earning interest on their loans and investments, while paying interest on customer deposits. The difference between the interest earned and the interest paid is called net interest income, and this is a key source of profit for the bank. --- 10. Bank Business Activity: Off-Balance Sheet Activities Original Text: Off-balance sheet activities include financial services and transactions that are not listed as assets or liabilities on the bank’s balance sheet. These activities can include: Derivatives, letters of credit, bank guarantees, security underwriting, and forward exchange contracts. These activities create contingencies or commitments but don’t immediately appear on the balance sheet. They generate fee-based income for the bank. Long Explanation: Off-balance sheet activities refer to services that don’t directly show up on the bank’s balance sheet, but they can still generate income. Examples of these activities include: Derivatives: Complex financial contracts that the bank uses to make profits by predicting changes in things like stock prices or interest rates. Letters of credit: A bank guarantees that a buyer’s payment to a seller will be made on time and for the correct amount. Bank guarantees: The bank promises to pay the debt if the borrower defaults. Security underwriting: The bank helps companies issue new stocks or bonds. Forward exchange contracts: These are agreements to buy or sell currency at a future date for a predetermined price. These activities help banks generate income through fees without adding to their assets or liabilities. --- 11. Types of Banking Services/Activities Original Text: Retail banking: Services directly provided to individuals and small businesses. Business banking: Services aimed at mid-sized companies. Corporate banking: Services provided to large corporations. Private banking: Wealth management services for high-net-worth individuals. Investment banking: Deals with activities like trading, mergers, and fundraising in financial markets. Other classifications: Offshore banking, universal banking, etc. Long Explanation: Banks offer a variety of services based on the needs of different customers: Retail banking: These are the day-to-day banking services provided to individuals and small businesses, like checking accounts, personal loans, or credit cards. Business banking: These services are aimed at medium-sized businesses, helping them with loans, credit, and other financial services to grow their operations. Corporate banking: These services are targeted at large corporations, offering more complex products like mergers and acquisitions, or large-scale loans. Private banking: These are specialized services provided to wealthy individuals, such as investment advice, estate planning, or managing their assets. Investment banking: This service deals with financial markets, helping companies raise money by selling stocks or bonds, and advising on mergers or takeovers. Offshore banking: This refers to banking services provided in foreign countries, which often come with tax benefits or different regulations. Universal banking: This refers to a bank that offers a wide range of financial services, including both commercial and investment banking. --- 12. Key Risks Faced by Banks Original Text: Credit risk: The risk of a borrower not repaying their loan. Liquidity risk: The risk that a bank won’t have enough cash to meet its obligations. Market risk: The risk that changes in market prices (interest rates, stock prices) will reduce the value of the bank’s assets. Operational risk: The risk of losses from failed internal processes or systems. Reputational risk: The risk of losing customer trust due to scandals or bad practices. Macroeconomic risk: The risk that economic conditions (like a recession) will negatively affect the bank’s business. Cyber risk: The risk of losses or disruptions from cyber-attacks or data breaches. Long Explanation: Credit risk: This happens when a borrower fails to repay a loan, which results in a loss for the bank. Liquidity risk: If many customers want to withdraw their money at the same time, the bank may not have enough cash on hand to meet their demands. Market risk: Changes in things like interest rates or stock prices can reduce the value of the bank’s investments, leading to losses. Operational risk: Mistakes or failures in the bank’s internal processes, systems, or people can lead to financial losses. Reputational risk: If a bank gets involved in a scandal or is seen as untrustworthy, it can lose customers, which would hurt its business. Macroeconomic risk: If the overall economy is in a downturn, businesses might fail or people might default on loans, affecting the bank’s profits. Cyber risk: The risk of a bank being targeted by cyber-attacks, where hackers steal money, sensitive information, or disrupt the bank’s services. --- 13. Risk Management for Banks Original Text: Banks should manage and control risks by maintaining: Capital Adequacy: Sufficient capital to absorb potential losses. Profitability: A good return on assets (ROA) and return on equity (ROE). Liquidity: Managing assets and liabilities to ensure they can meet short-term obligations. Good Management and Corporate Governance: Ensuring responsible and ethical leadership. Compliance with Prudential Requirements: Following regulations and maintaining safe banking practices. Long Explanation: Banks manage risks through several key strategies: Capital adequacy: Banks must hold enough capital (financial reserves) to absorb losses if something goes wrong. This acts as a safety cushion. Profitability: Banks need to ensure that they are making a good return on the assets they have (like loans and investments), and on the money invested by their shareholders. Liquidity: Banks need to carefully balance their assets (like loans) and liabilities (like deposits) to make sure they always have enough cash available to meet short-term obligations, like customer withdrawals. Good management and corporate governance: Strong leadership and ethical practices are essential for managing risks and running the bank effectively. Compliance with regulations: Banks must follow strict regulations (like those Continuing from where we left off, here’s the rest of the detailed explanation of the document: --- 13. Risk Management for Banks (Continued) Original Text: Compliance with Prudential Requirements: Following regulations and maintaining safe banking practices. Long Explanation: Banks must follow rules set by governments and financial regulators to ensure they operate safely. These rules, called prudential requirements, are in place to protect the bank, its customers, and the economy. They help prevent excessive risk-taking and ensure banks have enough financial reserves to cover potential losses. --- 14. Non-Bank Financial Institutions (NBFIs) Original Text: Non-bank financial institutions (NBFIs) provide banking-like services without having a banking license. NBFIs include finance companies, insurance companies, microfinance institutions, and leasing companies. They offer specific financial products, such as loans, savings accounts, investments, and money transfer services. Long Explanation: Non-bank financial institutions (NBFIs) provide services similar to those offered by traditional banks, but they do not have a full banking license. Instead, they focus on specific areas of finance and may not offer all the services that banks do. Some examples of NBFIs include: Finance companies: These offer loans to individuals and businesses, often focusing on personal loans, home loans, or vehicle financing. Insurance companies: They provide protection against financial losses from events like accidents, illness, or property damage in exchange for regular premium payments. Microfinance institutions: These organizations provide small loans to people who don’t have access to traditional banking services, often in rural or low-income areas. Leasing companies: They help individuals and businesses by providing equipment or vehicles on lease, meaning the customer rents the item for a specific period instead of buying it outright. --- 15. Merchant Banks and Investment Banks Original Text: Merchant banks work with smaller companies to help them raise funds by issuing securities that require less regulatory disclosure. Investment banks provide services for issuing and managing investments, and help companies raise capital through initial public offerings (IPOs). Both types of banks offer advisory services for mergers and acquisitions. Long Explanation: Merchant banks: These specialize in helping smaller companies that may not have the resources to go public or raise money through traditional stock markets. They help these companies raise funds by issuing securities (like bonds or shares) to a limited number of investors, and this process is simpler and requires fewer disclosures. Investment banks: These banks are involved in bigger, more complex financial deals. They help large companies raise capital by issuing stocks or bonds and advise them during initial public offerings (IPOs), which is when a company sells its shares to the public for the first time. They also provide advice on mergers and acquisitions, helping companies buy or merge with other companies. --- 16. Insurance Companies Original Text: Insurance is a system where individuals or businesses pay regular premiums to protect themselves against financial losses from future risks. Insurance companies collect premiums, invest the funds, and pay out in case of losses. Categories include: Long-term insurance (life insurance): Pays a sum of money after the policyholder’s death or at a certain age. General insurance: Covers risks like car accidents, theft, or property damage. Reinsurance: Provides insurance for insurance companies, sharing risks and protecting against large losses. Long Explanation: Insurance companies help people and businesses protect themselves from financial losses. Customers pay a regular fee called a premium, and in return, the insurance company agrees to pay them a certain amount of money if something bad happens, like an accident, illness, or death. Long-term insurance (life insurance): This type of insurance is meant to protect families in case the insured person dies or reaches a certain age. The insurance company will pay a lump sum or regular payments to the beneficiaries. General insurance: This covers a wide range of risks, including car accidents, home damage, theft, or health expenses. It helps policyholders recover financially when unexpected events happen. Reinsurance: Even insurance companies need protection. Reinsurance allows one insurance company to sell part of its risk to another insurance company, reducing the potential loss from big events (like natural disasters). --- 17. Pension Funds Original Text: Pension funds manage retirement savings for individuals and companies. They collect contributions from employees and employers, invest the funds, and pay out retirement benefits to individuals. The main purpose of a pension fund is to provide financial security for individuals in their retirement years. Long Explanation: Pension funds are organizations that help people save money for their retirement. They work by collecting regular contributions from employees and their employers over the course of the employee's working life. The pension fund then invests this money in things like stocks, bonds, or real estate to make it grow. Once the individual retires, the pension fund pays them regular benefits, providing them with income during their retirement years. --- 18. Factoring Companies Original Text: Factoring companies purchase unpaid invoices or receivables from businesses at a discount, helping those businesses improve their cash flow. Factoring is especially useful for businesses that need immediate funds but have to wait for their customers to pay invoices. Long Explanation: Factoring companies provide a solution for businesses that are waiting for customers to pay their invoices. Instead of waiting for weeks or months, businesses can sell their unpaid invoices to a factoring company at a discount. This way, the business gets most of the money upfront, and the factoring company collects the payment from the customer later. It's a quick way for businesses to get cash when they need it, helping them manage their cash flow better. --- 19. Cooperatives Original Text: Cooperatives are member-owned organizations that provide banking, savings, and loan services to their members. Members are both customers and owners of the cooperative, and profits are shared among members. Cooperatives often focus on serving local communities or specific groups, such as farmers or small businesses. Long Explanation: Cooperatives are financial institutions owned and operated by their members. The people who use the cooperative’s services—such as savings accounts or loans—are also the owners. This means that any profits made by the cooperative are shared among the members instead of going to shareholders. Cooperatives often have a focus on helping specific communities or groups, like farmers, small businesses, or local residents. --- 20. Escrow Companies Original Text: Escrow companies act as neutral third parties in financial transactions, holding funds or assets until all conditions of the transaction are met. Escrow is often used in large transactions, such as real estate deals, to ensure the buyer and seller both fulfill their obligations before the money or property changes hands. Long Explanation: Escrow companies play an important role in major financial transactions, especially in real estate deals. In an escrow arrangement, the escrow company holds onto money or property until both the buyer and seller meet all the conditions of their agreement. For example, if you're buying a house, the escrow company holds onto your payment until the seller has completed all necessary paperwork, ensuring a safe and secure transaction for both parties. --- 21. Credit Unions Original Text: Credit unions are member-owned financial cooperatives that offer banking services like savings accounts, loans, and credit cards. Unlike traditional banks, credit unions are not-for-profit, and profits are returned to members through better rates and lower fees. Long Explanation: Credit unions are a special type of financial institution where the customers are also the owners. Instead of operating for profit like traditional banks, credit unions focus on serving their members. Any profits made by the credit union are used to provide members with better interest rates on loans or higher interest rates on savings, as well as lower fees for services. This makes credit unions a popular choice for people who want to save money on banking services. --- 22. Leasing Companies Original Text: Leasing companies provide financing by purchasing equipment or property and leasing it to individuals or businesses for a set period. Leasing is an alternative to buying, allowing businesses to use equipment or property without the upfront cost of ownership. Long Explanation: Leasing companies help businesses and individuals by providing equipment or property through leasing agreements. Instead of buying something expensive upfront, such as a vehicle or machinery, a business can lease it from the leasing company for a monthly payment over a set period. Leasing is a great way for businesses to get the equipment they need without having to spend a lot of money right away, and at the end of the lease, they can often buy the equipment or return it and lease something new. — 1. Financial Instruments Original Text: A financial instrument is a contract that creates a financial asset for one entity and a financial liability or equity instrument for another entity. It is a tradable asset of any kind: cash, evidence of an ownership interest in an entity, etc. Explanation: A financial instrument is basically a document or agreement that represents money. For one party, it’s an asset (something they own that has value), and for another party, it’s a liability (something they owe). Examples include: Cash: The simplest type of financial instrument. Ownership interest: This could be shares in a company, meaning you own part of that company. --- 2. Deposits Original Text: Deposits are sums of money placed with a financial institution for credit to a customer’s account. There are three main types of deposits: 1. Demand deposits: Can be withdrawn at any time, don’t earn interest. 2. Savings deposits: Earn interest, can be withdrawn anytime. 3. Fixed/Time deposits: Locked for a specific period and earn higher interest. Explanation: A deposit is when you put your money into a bank account. There are different kinds of deposits: 1. Demand deposits: You can take the money out whenever you want, but it won’t earn interest. 2. Savings deposits: Your money earns some interest, and you can take it out whenever you need. 3. Fixed/Time deposits: You leave the money in the bank for a set time (like 6 months or a year), and in return, you earn a higher interest rate. --- 3. Types of Loans Original Text: A loan is a specified sum of money provided by a lender to a borrower, to be repaid at agreed dates and interest rates. Secured loans: Require collateral (like property). Unsecured loans: Do not require collateral. Subsidized loans: Have reduced interest through a subsidy. Syndicated loans: Provided by a group of lenders to a single borrower. Explanation: A loan is when you borrow money from a bank or financial institution, and you agree to pay it back over time with interest. There are different types of loans: Secured loans: You need to offer something valuable (like your house) as security. If you don’t pay back the loan, the bank can take this asset. Unsecured loans: You don’t need to provide anything as security, but the interest rate may be higher. Subsidized loans: These loans have lower interest rates because they are supported by the government or another organization. Syndicated loans: Multiple lenders pool their money together to give a large loan to one borrower. --- 4. Debt vs. Equity Original Text: Debt: Not an ownership interest. Creditors don’t have voting rights, but they have legal recourse if payments are missed. Equity: Ownership interest. Stockholders have voting rights but no guaranteed payment (dividends). Explanation: Debt is money that a company borrows. It’s not ownership. People who lend the money (creditors) don’t get a say in how the company is run, but if the company doesn’t pay them back, they can take legal action. Equity means owning part of a company (like shares). Shareholders get to vote on company decisions, but they don’t always get paid. They only receive dividends if the company decides to distribute profits. --- 5. Debt Instruments – Bonds Original Text: A bond is a debt instrument, which is a certificate showing that a borrower owes a specified sum. Bonds are issued by governments and corporations to raise capital. Features: Coupon rate Face value Time to maturity Yield to maturity (YTM) Explanation: A bond is a loan given to a company or government by an investor. In return, the company or government promises to pay back the loan on a certain date with interest (called the coupon). The bond has certain features: Coupon rate: The interest rate paid to the bondholder. Face value: The amount the bond will be worth when it matures. Time to maturity: How long until the bond has to be paid back. Yield to maturity (YTM): The return an investor will get if they hold the bond until it matures. --- 6. Government Bonds – Treasury Bills and Bonds Original Text: Treasury bills (T-bills) are short-term government securities with maturities up to one year, sold at a discount to face value. Treasury bonds are medium- to long-term government securities with regular interest payments (coupons). Explanation: Treasury bills (T-bills) are a type of government bond that is sold for less than its value. For example, you might buy a T-bill for Rs. 900, and when it matures, the government will pay you Rs. 1,000. This difference is your profit, or interest. Treasury bonds, on the other hand, are longer-term investments (from 2 to 30 years). They pay you interest regularly, usually every six months, until they mature, at which point you get back the face value. --- 7. Repurchase Agreements (Repos) Original Text: A repurchase agreement (repo) involves selling securities (usually government securities) for cash with a commitment to repurchase the same or similar securities at a later date for a fixed price. Explanation: A repo is like a short-term loan. A bank or financial institution sells a security (like a government bond) to someone for cash but agrees to buy it back at a later date for a higher price. The difference between the selling price and the repurchase price is the interest earned on the loan. --- 8. Corporate Bonds Original Text: Corporate bonds are medium- to long-term securities issued by private sector companies to raise funds. Debentures are the most common form of corporate debt. Explanation: Corporate bonds are similar to government bonds, but they are issued by companies instead of governments. Companies sell these bonds to raise money for their business. Debentures are a common type of corporate bond. They are not backed by any specific asset, meaning they are riskier, but they typically pay higher interest rates. --- 9. Shares and Equity Instruments Original Text: Shares represent ownership in a company and give shareholders a claim on the company’s earnings and assets. Types of shares: Ordinary shares: Have voting rights but are last to be paid if the company goes bankrupt. Preference shares: Have a fixed dividend but no voting rights. Explanation: When you buy shares, you own a small part of the company. If the company makes money, shareholders may get a portion of the profits, called dividends. There are two main types of shares: Ordinary shares: You get to vote on important company decisions, but if the company goes out of business, you’re the last to get paid. Preference shares: You don’t get to vote, but you are guaranteed a fixed dividend every year before ordinary shareholders are paid. --- 10. Unit Trusts Original Text: A unit trust is a collective investment where many investors pool their money to create a larger investment fund, which is managed by a professional. Explanation: A unit trust works by pooling money from lots of different investors. This creates a big pot of money, which a professional manager then invests in things like stocks, bonds, or property. Each investor owns a "unit" of the trust, and the value of that unit goes up or down depending on how well the investments perform. --- 11. Venture Capital Original Text: Venture capital (VC) is money provided to early-stage and emerging companies in exchange for equity. VC funds invest in companies with high growth potential, particularly in technology sectors. Explanation: Venture capital is money given to new or growing businesses, often in industries like technology or biotech. In return for this investment, the VC firm takes a share of the company. If the company becomes successful, the VC firm can make a big profit. --- 12. Financial Derivatives Original Text: Financial derivatives are contracts whose value comes from the performance of an underlying asset, like stocks or commodities. Examples include futures contracts, options, and swaps. Explanation: Financial derivatives are contracts that are based on the value of another asset. They are used by investors to hedge against risk or to make a profit by predicting changes in prices. Examples include: Futures contracts: Continuing from where we left off, here is the explanation of the remaining concepts from the document: --- 12. Financial Derivatives (Continued) Original Text: Futures contracts: An agreement to buy or sell an asset at a specific price at a specific date in the future. Options: Contracts that give the holder the right, but not the obligation, to buy (call option) or sell (put option) an asset at a specific price before a specific date. Swaps: Financial contracts in which two parties exchange cash flows or other financial instruments (such as interest rate or currency swaps). Explanation: Futures contracts: These are agreements to buy or sell something (like oil, gold, or a financial asset) at a future date for a price agreed upon now. Investors use futures to hedge against price changes or to speculate on future price movements. Options: Call option: Gives you the right to buy an asset at a specific price within a set time frame. You aren't required to buy, but you have the option to do so if the market price becomes favorable. Put option: Gives you the right to sell an asset at a specific price before a certain date. If the market price drops below the price set in your contract, you can sell at the higher contract price. Swaps: These are contracts between two parties where they agree to exchange one kind of cash flow for another. For example, a currency swap lets two companies exchange different currencies to hedge against changes in exchange rates. An interest rate swap allows a company with a fixed interest rate loan to exchange its interest payments with a company that has a variable interest rate loan. --- 13. Warrants Original Text: Warrants are derivatives that give the holder the right to buy or sell a security (usually an equity) at a certain price before expiration. Unlike options, warrants are issued by the company itself and exist for a longer term. Explanation: Warrants work similarly to options, giving the holder the right to buy or sell a company's stock at a specific price before a certain date. However, the key difference is that warrants are issued directly by the company and often have a longer lifespan than options. If the price of the stock rises above the set price, the warrant holder can buy it at the lower price and make a profit. --- 14. Credit Default Swaps (CDS) Original Text: Credit default swaps (CDS) are financial derivatives that allow the transfer of credit risk. The buyer of the swap makes payments to the seller, and in return, the seller compensates the buyer if a loan or security defaults. Explanation: A credit default swap (CDS) is like an insurance policy for loans or bonds. Suppose you are worried that a company might not pay back its loan (default). You can buy a CDS from another party, and if the company does default, the CDS seller will compensate you for the loss. In exchange, you pay a regular fee (just like paying an insurance premium). --- 15. Structured Finance Original Text: Structured finance refers to complex financial instruments that are created to manage risk, typically by pooling and repackaging cash flows from various loans. Examples include Collateralized Debt Obligations (CDOs) and Asset-Backed Securities (ABS). Explanation: Structured finance involves creating special financial products to manage risk. These products take loans or debts (like mortgages or credit card debts), bundle them together, and then sell them to investors as securities. Collateralized Debt Obligations (CDOs): These are complex investments that pool together loans (like mortgages) and split them into different levels of risk, offering them to investors based on their risk tolerance. Asset-Backed Securities (ABS): These are similar to CDOs but are backed by a pool of assets like car loans, student loans, or mortgages. Investors in ABS receive a share of the cash flows generated by the payments made on the underlying assets. --- 16. Securitization Original Text: Securitization is the process of taking an illiquid asset (like loans or mortgages) and transforming it into a security that can be sold to investors. The process involves pooling various types of contractual debt and selling the related cash flows to third-party investors. Explanation: Securitization is a way for financial institutions to turn things like loans or mortgages into marketable securities. For example, a bank might take a bunch of home mortgages and package them together. These are then sold as bonds to investors, who receive the mortgage payments (principal and interest) from homeowners. This process allows the bank to free up money for more lending. --- 17. Contingent Convertibles (CoCos) Original Text: Contingent convertibles (CoCos) are hybrid capital securities that convert into equity or suffer a principal write-down when the issuing bank’s capital falls below a certain level. These are mainly used in times of crisis to boost bank capital. Explanation: Contingent convertibles (CoCos) are special types of bonds issued by banks. They act like regular bonds, paying interest to the investor, but in the event of a financial crisis, they can automatically convert into shares (equity) in the bank or be reduced in value. This conversion helps the bank raise more capital when it’s struggling financially, without having to issue new shares or borrow more money. --- 18. Unit Trusts Original Text: Unit trusts are collective investment funds where investors pool their money to invest in a diversified portfolio of assets, like shares or bonds. The fund is divided into units, and investors buy these units. Explanation: A unit trust works by gathering money from a large number of investors and putting it into a big fund that is managed by professionals. The money in the fund is used to invest in a variety of assets, like stocks or bonds. Investors buy units of the trust, meaning they own a part of the fund, and their return depends on how well the fund's investments perform. --- 19. Government Securities: Treasury Bills and Bonds Original Text: Treasury bills (T-bills): Short-term government securities with maturities up to one year. Sold at a discount to face value. Treasury bonds: Medium- and long-term government securities with fixed interest payments. Explanation: Treasury bills (T-bills) are government-issued bonds that mature within one year. They don’t pay regular interest. Instead, you buy them at a discount (for example, Rs. 950), and when they mature, you receive the full value (Rs. 1,000). Treasury bonds are longer-term government-issued bonds that pay regular interest (coupons) until they mature. For example, you might receive interest every six months, and when the bond matures (in 2-30 years), you get back the full amount you invested. --- 20. Venture Capital Original Text: Venture capital (VC) is funding provided to early-stage companies in exchange for equity. It is often invested in businesses with high growth potential, especially in technology sectors. Explanation: Venture capital (VC) is money given to startups or new businesses in exchange for a share of the company (equity). Venture capitalists typically invest in young companies with a lot of potential to grow, particularly in areas like technology or biotechnology. If the company becomes successful, the venture capitalists can make a big profit when the company grows or goes public. — To provide a full and detailed explanation of the content based on the document, I will break it down systematically. I'll include both the original text and a detailed, simplified explanation for each section. --- 1. Direct and Indirect Finance Original Text: Direct Financing: Advantages: Flexibility and the ability to customize. Disadvantages: Time-consuming and requires more research. Indirect Financing: Advantages: Ability to expedite the entire process. Disadvantages: Reliance on third parties, service fees, etc. Explanation: Direct Financing means that the borrower gets money directly from the investor without needing an intermediary, like a bank. It’s flexible because you can negotiate the terms yourself, but it can be slow and requires a lot of effort to find investors. Indirect Financing involves intermediaries like banks. It’s faster because the intermediary handles the process, but you may have to pay service fees or commissions. --- 2. Financial Markets and Instruments Original Text: Financial markets: A place where individuals and institutions meet to trade financial assets. Instruments (securities): Traded in financial markets to channel funds from lenders-savers to borrowers-spenders. Explanation: Financial markets are where buyers and sellers trade things like stocks, bonds, or other financial products. These markets help direct money from people or institutions that have extra money (savers) to those who need money to invest or grow (borrowers). Financial instruments include items like stocks (shares of ownership in a company) and bonds (loans made to a company or government), and they make it easier to move money through the economy. --- 3. Financial Markets – Key Functions Original Text: Providing price information about financial assets. Offering liquidity by providing marketability for financial assets. Reducing the cost of buying and selling financial assets (search costs and information costs). Promoting economic efficiency by allocating capital, increasing production. Explanation: Financial markets help investors know the price of financial products, such as stocks or bonds. They provide liquidity, which means you can buy and sell these assets easily. They reduce costs by making it simpler to find buyers and sellers, saving time and effort. By moving money to the right places, financial markets help the economy work more efficiently, making businesses more productive. --- 4. Financial Risk Original Text: Financial risk: The likelihood of losing money in a business or investment decision. Financial risk comes from many factors and involves uncertainty of return and potential financial loss. Explanation: Financial risk is the chance that an investment will result in a loss. It could come from things like changes in interest rates, falling stock prices, or economic downturns. When you invest, there’s always some risk involved because you can’t predict the future perfectly. --- 5. Risk-Return Tradeoff Original Text: Higher returns are associated with higher degrees of risk. The greater the risk, the larger the return investors require to compensate for taking that risk. Explanation: Risk-return tradeoff means that if you want to make more money from an investment, you’ll usually have to take on more risk. For example, investing in new or small companies can lead to big profits, but it also comes with a higher chance of losing your investment. Investors expect bigger returns when they take bigger risks. --- 6. Risk Reduction: Diversification Original Text: Diversification: Reducing risk by spreading investments across different assets. Forming a portfolio can eliminate the riskiness of individual shares. Explanation: Diversification is a strategy to lower risk by investing in different types of assets (like stocks, bonds, and real estate) rather than putting all your money into one thing. This way, if one investment performs poorly, the others might still do well, reducing the overall risk. --- 7. Risk Reduction: Hedging Original Text: Hedging: A method for reducing risk of adverse price movements in an asset. Derivatives are used extensively to mitigate many types of risk. Explanation: Hedging is like taking out insurance for your investments. For example, if you own shares in a company and you’re worried the price might fall, you can hedge your risk by buying a derivative (such as an option) that will give you money if the price does drop. This limits the potential losses from your investment. --- 8. Primary and Secondary Markets Original Text: Primary Markets: Where new issues of securities or raising of new funds occur, such as selling new stocks or bonds. Secondary Markets: Where already-issued securities are traded among investors. Explanation: Primary markets are where companies or governments sell new securities, like when a company offers its shares to the public for the first time (IPO). Secondary markets are where these securities are bought and sold after the initial issue, such as when you buy or sell stocks on the stock market. --- 9. Debt and Equity Markets Original Text: Debt Markets: Where new debt is issued or traded, like bonds. Equity Markets: Where shares of companies are bought and sold. Explanation: Debt markets deal with bonds or loans. A company or government issues a bond, and the buyer receives regular interest payments until the bond matures. Equity markets are where company stocks (ownership shares) are traded. When you buy a stock, you own part of the company, and you may receive dividends if the company makes a profit. --- 10. Capital and Money Markets Original Text: Capital Markets: Involve instruments with maturities longer than one year, like treasury bonds and shares. Money Markets: Deal with short-term instruments, like treasury bills, that mature in less than a year. Explanation: Capital markets are for long-term investments like stocks and bonds that last for more than a year. They help companies and governments raise money for big projects. Money markets deal with short-term, highly liquid assets, like treasury bills. These are usually safer but offer lower returns, and they are often used for managing cash flow. --- 11. Spot/Cash and Derivative Markets Original Text: Spot/Cash Markets: Where financial instruments or commodities are traded for immediate delivery. Derivative Markets: Include futures, options, and swaps that derive their value from other assets. Explanation: In spot markets, buyers and sellers exchange assets like stocks, commodities, or currencies for immediate payment and delivery. In derivative markets, the contracts are based on the value of other assets (like stocks or bonds) but don't involve the actual buying and selling of the assets right away. These are used for managing risk or speculating on future price changes. --- 12. Foreign Exchange Markets Original Text: Foreign Exchange Market: A global decentralized market for trading currencies. Exchange rate: The value of one currency in terms of another. Explanation: The foreign exchange (forex) market is where people and institutions trade currencies. For example, if you’re traveling from Sri Lanka to the U.S., you would exchange Sri Lankan Rupees for U.S. Dollars. An exchange rate tells you how much of one currency you can get in exchange for another. For example, 1 U.S. Dollar might be worth 320 Sri Lankan Rupees. --- 13. Forward Exchange Transactions Original Text: Forward contract: An agreement to deliver currency at a future date at an exchange rate agreed upon today. Explanation: A forward contract is a deal between two parties to exchange a currency at a future date, but the exchange rate is agreed upon now. For example, if you’re worried that the exchange rate will worsen in six months, you can lock in today’s rate, and even if the rate changes, your deal stays the same. --- 14. Commodity Markets Original Text: Commodity Market: Trades in primary products, such as agricultural products or natural resources (e.g., oil, gold). Futures contracts are used extensively in commodity markets. Explanation: Commodity markets are where raw materials like oil, gold, wheat, and coffee are bought and sold. Many investors trade futures contracts in these markets to lock in prices for these commodities at a future date, which helps both producers and buyers manage price risks. --- 15. Internationalization of Financial Markets Original Text: Eurobond: A bond issued in a currency other than that of the country in which it is sold. Eurodollar: U.S. dollars deposited in foreign banks outside the U.S. Explanation: A Eurobond is a bond that is issued in a foreign currency. For example, a company in France might issue a bond in U.S. dollars to attract investors from other countries. Eurodollars are U.S. dollars that are kept in banks outside the U.S., often for international trade or to avoid certain regulations. --- 16. Financial Markets in Sri Lanka Original Text: Colombo Stock Exchange (CSE): The main stock exchange in Sri Lanka, with 289 listed companies. Explanation: The Colombo Stock Exchange (CSE) is the Continuing from where we left off, here’s the detailed explanation of the remaining content: --- 16. Financial Markets in Sri Lanka (Continued) Original Text: Colombo Stock Exchange (CSE): The main stock exchange in Sri Lanka, with 289 listed companies. The market is regulated by the Securities and Exchange Commission. The CSE operates two main systems: the Central Depository System (CDS) and the Automated Trading System (ATS). Explanation: The Colombo Stock Exchange (CSE) is where most of Sri Lanka’s public companies list their stocks for trading. It’s the primary place where shares are bought and sold. The market is watched over by the Securities and Exchange Commission, which ensures fair and transparent trading practices. Central Depository System (CDS): This is where the stocks and bonds are electronically stored and managed, making buying and selling shares easier and more secure. Automated Trading System (ATS): This is the computerized system that matches buyers and sellers of stocks and bonds on the exchange. --- 17. Key Indicators of the Equity Market Original Text: All Share Price Index (ASPI): A market capitalization-weighted index reflecting the performance of all stocks listed on the CSE. S&P Sri Lanka 20 Index (S&P SL20): Covers the largest and most liquid stocks from the Sri Lankan equity market. Sector Indices: Reflect the performance of specific sectors in the economy. Price-Earnings Ratio (P/E): Measures a company’s current share price r

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