This document contains 3 topics: 1) It defines banks and describes their functions, roles, and importance in modern life. 2) It explains asymmetric information and gives examples like doctors, insurance, and subprime loans. It also discusses solutions to asymmetric information. 3) It defines financial markets, gives types like stock, bond, and commodities markets, and describes functions like putting savings to productive use and determining security prices.

1. Assignment On:Topic 1: Define bank. Explain the functions, roles and
importance of bank in modern day life.
Topic 2: What is meant by Asymmetric Information? give examples of some
Asymmetric Information and how bank can prepare themselves to face such
situations?
Topic 3 :Structure of Financial Markets: Explain in detail the structure of
financial market with examples and classifications.
Submitted to
Ahmed Bin Yamen
Submitted by
Asif Imtiaz
Id:19301014
Submission Date:20/10/2021

2. Topic 1
Definition of Bank:
Different Authors and Economists have given some structural and functional
definitions on Bank from different angles:
“ Bank is a financial intermediary institution which deals in loans and advances”---
Cairn Cross.
“ Bank is an institution which collects idle money temporarily from the public and
lends to other people as per need.”---- R.P. Kent.
“ Bank provides service to its clients and in turn receives perquisites in different
forms.”--- P.A. Samuelson.
“ Bank is such an institution which creates money by money only.”-----W. Hock.
“ Bank is such a financial institution which collects money in current, savings or fixed
deposit account; collects cheques as deposits and pays money from the depositors‟
account through cheques.”-----Sir John Pagette.
Indian Company Law 1936 defines Bank as “ a banking company which receives
deposits through current account or any other forms and allows withdrawal through
cheques or promissory notes.”
Functions of Central Bank:

3. The functions of central bank are different from other banks. The following
functions of central bank are stated below:
A. Traditional or general functions:
1. Issue of notes and coins:
The first and foremost function of central bank is to issue notes and coins as
per needs of the public and requirement of business and commerce. As per
rules, notes are issued against gold, silver and foreign currency. Bangladesh
Bank (Central Bank) keeps foreign currency reserves as security against
issuance of notes. Bangladesh Bank unilatarilly reserves the right to issue
notes.
The arguments in its favour are as follows: (a) To maintain equilibrium in
quality between notes and currency issue
(b) To maintain equilibrium in size, types and values of notes and currency ©
To maintain stability in rates of exchange both inland and foreign
(c) To create confidence on the people
(d) To control money market.
2. Government Bank:
Central Bank acts as banker and economic adviser of the Government. The
central bank conducts and maintains Government accounts for all
Government receipts and payments.
3. Banker’s Bank:
Central Bank acts as banker‟s bank. As a rule, all scheduled and commercial
banks have to maintain Statutory Liquidity Reserve(SLR) 18% with Bangladesh
Bank(CRR: 5% and Bonds & Securities 13%).
4. Lender of the last Resort:
In case of financial crisis of the commercial banks, central bank acts as a
lender of the last resort through lending against first class securities, bill of
exchange etc.
5. Reservoir of foreign currency:
Central Bank maintains Foreign Currency Reserve. For the purpose of control
of foreign currency, the following factors are responsible:
(a) For issuance of notes
b) For payments of liabilities (
c) For payments of debts.

4. 6. Clearing House:
Central Bank acts as a Clearing House for settlement of inter bank
transactions.
7. Credit Control:
Credit Control is one of the major functions of central bank. The following are
the ways of controlling credit: (a) Change in bank rates
(b) Open market operation
(c) Change ( increase or decrease) in reserve- ratio
(d) Selective credit
(e) Direct influence
(f) Moral suasion
(g) propaganda.
B. Purposeful functions:
(a) Control Currency Market:
Central Bank acts as a controller and guardian of the currency market. For the
purpose of formation, control and maintenance of currency market and for its
overall development, central bank is the pioneer.
(b) Stabilize Exchange Rate:
Central Bank maintains stability of the foreign currency exchange rates by
means of controlling credit. Stable exchange rates position helps create
favourable balance of trade and acceptability of stable currency gets
momentum in the international market.
(c) Maintain Gold Standard:
Central Bank is responsible for maintenance and control of gold reserve.
(d) Stabilize Price-Level:
Fluctuations and frequent changes of price-level affect economic growth. With
a view to making good of the economic imbalances and crisis situations,
central bank takes necessary measures for stabilizing price-level.
(e) Stabilize business activities:
Central Bank formulates credit policy and with this spirit, central bank takes
necessary steps to protect economic depression for stabilizing business
activities.
(f) Employment opportunities:

5. Central Bank takes initiatives for creating employment opportunities by means
of credit-control mechanism.
C. Expansion and Development Functions:
(a) Development of Agriculture Sector: Central Bank formulates policy for
expansion of Agri-sector for the purpose of economic upliftments in the
country.
(b) Development of Industry Sector:
(c) Development of natural resources: Central Bank plays vital role for
tapping natural resources which may lead to economic growth.
D. Other Functions:
(a) Adviser and Representative of Government:
Central Bank advises Government on economic issues and sometimes acts as
a representative of the Government.
(b) Economic Research:
Central Bank conducts various economic research works and formulates
policies for economic development. Central Bank conducts survey on different
economic issues for the knowledge of the general public of the country.
Roles and importance of Bank in Modern Day Life:
Objectives of Bank:
1. To establish as an institution for maximizing profits and to conduct overall
economic activities.
2. To collect savings or idle money from the public at a lower rate of interests and
lend these public money at a higher rate of interests.
3. To create propensity of savings amongst the people.
4. To motivate people for investing money with a view to bringing solvency in them .
5. To create money against money as an alternative for enhancing supply of money.
6. To build up capital through savings.
7. To expedite investments.
8. To extend services to the customers.

6. 9. To maintain economic stability by means of controlling money market.
10. To extend co-operation and advices to the Govt. on economic issues.
11. To assist the Govt. for trade& business and socio-economic development.
12. To issue and control notes and currency as a central bank.
13. To maintain and control exchange rates as a central bank.
Why Are Banks so important in modern day life?
A well-functioning financial system is fundamental to a modern economy, and banks
perform important functions for society. They must therefore be secure.
Banks should be able to lend money to consumers and businesses in both upturns
and downturns. In addition, payments for goods and services should be processed
swiftly, safely and at low cost.If banks fail to perform these tasks, the consequences
for the entire economy could quickly become so wide-reaching that even the banking
system would be exposed to large shocks. It is therefore important that banks are
able to absorb losses and meet their current payment obligations.To ensure this,
banks must comply with strict regulatory requirements. Among these are the capital
and liquidity (money that can be paid on short notice) requirements applying to
banks in order to ensure that they can meet their current payment obligations.The
banks’ own payment systems are also required to be secure and efficient.
Topic 2
What is Asymmetric Information:
Asymmetric information, or information asymmetry, is where one party in a
transaction has more information than the other. In other words, the seller of a
good may know more about its true worth than the consumer. As a result, the

7. consumer pays more than the good is worth to them, had they known the full
information.
The term ‘asymmetric’ refers to the absence of symmetry. This is where things
are not equal. So with regards to an economic transaction, asymmetric
information is where the buyer and seller have unequal information.
Some Asymmetric Information Examples
1. Doctors
Trained doctors undertake years and years of medical education. In turn, their
knowledge over healthcare matters is naturally superior to the average
patient.
Therefore, in an economic transaction, it is difficult for the consumer to contest
the diagnosis. The prescribed treatment may cost $20k, but without having
that medical knowledge, there is no way of plausibly disputing this.
Although the internet has allowed people to get a better understanding of their
condition, there still exists a huge gap in understanding between the two
parties.

8. 2. Insurance
Insurance is a classic example of adverse selection which leads to
asymmetrical information. When an insurer and a customer enter into an
agreement, the customer has far more information on themselves than the
insurer.
For instance, a health insurer has no idea of the customers habits. Do they
smoke a packet of cigarettes a day, or do they eat enough fruit and
vegetables? Such factors may make the transaction riskier to the insurer as it
may lead to a greater risk of a serious illness.
The insurer may be able to overcome such asymmetrical information by hiring
a doctor to do an examination for instance. This may allow it to obtain a
greater deal of information of how healthy the customer is and price
accordingly.
However, what we may see is a moral hazard. Even if the insurer is able to
obtain information symmetry (have the same information as the customer), the
customer may in fact become more reckless as a result of having insurance.
This may not necessarily be the case in health insurance, but is more
prominent in the likes of gadget insurance. For example, someone who is
insured may leave their laptop unattended whilst they go to the lavatory. This
increases the risk of it being stolen; a risk than the customer knows they don’t
have to bear.
3. Finance
One of the best examples of asymmetrical information was the circulation of
toxic assets prior to the 2008 Financial Crisis. Banks that made sub-prime
loans bundled them in with more secure loans and sold them on as financial
securities.

9. What we saw was that the banks who sold the sub-prime loans packaged
them up knowing there were toxic assets included. However, investors that
purchased such bundled securities did not know of this significant risk.
The main indication they received was the AAA ratings that credit agencies
gave such products. So the reality of the situation was that only the banks
truly knew how risky these securities were.
Solutions to Asymmetric Information
The problem with asymmetric information is that either the consumer or the seller
has a lack of information. What this means is that one side either over or underpays.
Now the issue is that the other party is unable to obtain sufficient information to
make an informed purchase. Sometimes this cannot be fully overcome, but there
are potential solutions by which we are able to mitigate them.
1 – Availability of Information
This solution is of paramount importance which involves creating opportunities for
greater access to information to consumers. It is almost impossible to provide all the
information at a time, but sufficient information should be available for the user to
make an educated decision. As a result, along with improved customer satisfaction,
the overall quality of the product of the commodity can be improved. This paves way
for seamless communication and resolves many problems before they arise.
2 – Guarantees & Warranties
These benefits offer a cushion to consumers against faulty products. It offers them
the security that a particular product is of superior quality and in case of any defects,

10. the option of return/replacement to the seller is available for a given period of time.
This is useful in negotiating the prices as well.
3 – Taxes & Subsidies
Government intervention through policies is very common in case of market
imperfection
. For e.g. the healthcare market is not fully competitive as someone may be more
beneficial and someone can be worse off. The doctor (principle) stands to benefit
the most due to asymmetric information by them thereby controlling the health care
labor market
. Through monopolistic practices, many doctors or health specialists become better
off by taking additional payments from the patients. The government complete the
market or strike a balance between the gainers and losers. Normally, this is executed
by imposing higher taxes on the doctor and subsidies to receivers of the healthcare.
Topic 3
What are Financial Markets?
Financial markets, from the name itself, are a type of marketplace that provides an
avenue for the sale and purchase of assets such as bonds, stocks, foreign
exchange, and derivatives. Often, they are called by different names, including “Wall
street” and “capital market,” but all of them still mean one and the same thing. Simply
put, businesses and investors can go to financial markets to raise money to grow
their business and to make more money, respectively.
To state it more clearly, let us imagine a bank where an individual maintains a
savings account. The bank can use their money and the money of other depositors
to loan to other individuals and organizations and charge an interest fee.The
depositors themselves also earn and see their money grow through the interest that
is paid to it. Therefore, the bank serves as a financial market that benefits both the
depositors and the debtors.

11. Types of Financial Markets
There are so many financial markets, and every country is home to at least one,
although they vary in size. Some are small while some others are internationally
known, such as the New York Stock Exchange (NYSE) that trades trillions of dollars
on a daily basis. Here are some types of financial markets.
1. Stock market
The stock market trades shares of ownership of public companies. Each share
comes with a price, and investors make money with the stocks when they perform
well in the market. It is easy to buy stocks. The real challenge is in choosing the right
stocks that will earn money for the investor.
There are various indices that investors can use to monitor how the stock market is
doing, such as the Dow Jones Industrial Average and the S&P 500. When stocks
are bought at a cheaper price and are sold at a higher price, the investor earns from
the sale.
2. Bond market
The bond market offers opportunities for companies and the government to secure
money to finance a project or investment. In a bond market, investors buy bonds
from a company, and the company returns the amount of the bonds within an agreed
period, plus interest.
3. Commodities market
The commodities market is where traders and investors buy and sell natural
resources or commodities such as corn, oil, meat, and gold. A specific market is
created for such resources because their price is unpredictable. There is a
commodities futures market wherein the price of items that are to be delivered at a
given future time is already identified and sealed today.
4. Derivatives market

12. Such a market involves derivatives or contracts whose value is based on the market
value of the asset being traded. The futures mentioned above in the commodities
market is an example of a derivative.
Functions of the Markets
The role of financial markets in the success and strength of an economy cannot be
underestimated. Here are four important functions of financial markets:
1. Puts savings into more productive use
As mentioned in the example above, a savings account that has money in it should
not just let that money sit in the vault. Thus, financial markets like banks open it up to
individuals and companies that need a home loan, student loan, or business loan.
2. Determines the price of securities
Investors aim to make profits from their securities. However, unlike goods and
services whose price is determined by the law of supply and demand, prices of
securities are determined by financial markets.
3. Makes financial assets liquid
Buyers and sellers can decide to trade their securities anytime. They can use
financial markets to sell their securities or make investments as they desire.
4. Lowers the cost of transactions
In financial markets, various types of information regarding securities can be
acquired without the need to spend.