Banking and Financial Institutions PDF

Banking and Financial Institutions 2nd Semester Notes | A.Y 2023-2024 ✧₊ ⁺ Deposits is considered as Liability because if the individual will deposit...

Banking and Financial Institutions 2nd Semester Notes | A.Y 2023-2024 ✧₊ ⁺ Deposits is considered as Liability because if the individual will deposit his/her money, the bank will owe her Financial Institutions and ✧₊ ⁺ The bank owes the depositor his/ her money ✧₊ ⁺ Deposits is considered as Equity because hey are lending them at a Intermediaries higher interest rates ✧₊ ⁺ When customers deposit money into a bank, the bank does not own that money—it must be available for withdrawal.  Financial Institutions - offer financial service, ✧₊ ⁺ The bank uses deposits to issue loans and invest, but it must still not focusing to the flow fund, offers deposits repay depositors upon request. ✧₊ ⁺ Support para magkaroon ng capital ✧₊ ⁺ Depositors is also considered as silent investors. ✧₊ ⁺ Intermediaries that supports the savings of individuals, businesses and governments into loans or Direct Finance investments  is a borrower-lender relationship or transaction ✧₊ ⁺ Financial Intermediaries is the Subset of  does not involve any financial intermediary Financial Institutions  is when a direct or primary security flows from the borrowing unit to the lending or investing Financial unit Intermediaires Borrowers (Deficit Unit)  are the financial institutions that act as a bridge between investors or savers (surplus Banks, Borrowers, Issuing Corporation units or SUs) and borrowers or security Direct/Primary issuers (deficit units DUs). Securities Funds ✧₊ ⁺ Eg. Commercial banks, pension funds ✧₊ ⁺ reduce the cost of moving funds (banks, Investors (Surplus Unit) bonds markets) Bank, Depositors, Corporations  helps sell the primary securities Borrowers (Deficit Unit) ✧₊ ⁺ first issued stock of the firm Banks, Borrowers, Issuing Direct Corporation  issue their own financial instruments Finance (secondary securities) with the Market Specialists (Brokers and Use of Financial Institution that do not Financial Intermediaries are different from other Market resell) businesses. Specialist Non Financial / Other Investors (Surplus Unit) Depository Institutions Financial Institutions Bank, Depositors, Corporations Liabilities Liabilities Assets Assets and Equity and Equity Indirect Finance Loans Deposits Deposits Loans  is like the relationship between the depositor of a bank and the borrowers of the same bank. ✧₊ ⁺ Loans are considered as an asset ✧₊ ⁺ deposits are since depository institution are expecting a considered assets flow of income. There is an expectation of because they future cash inflows. represent cash or cash equivalents that the Depositors ✧₊ ⁺ They will be granting loans. So if company owns and can Direct Finance there are loans, there are future incomes. use. ✧₊ ⁺ Income is considered as an asset. ✧₊ ⁺ They are anticipating great ✧₊ ⁺ Loans as Indirect Liabilities Banks payments from the customers or the Direct Finance Finance For non- borrowers. financial institutions, ✧₊ ⁺ Principal + Interest rates loans are liabilities ✧₊ ⁺ Loans are assets for depository institutions because they bring future cash because they Borrowers represent borrowed inflows, generate interest income, and can money that must be be used as collateral or sold in secondary repaid. markets. 4 Banking and Financial Institutions 2nd Semester Notes | A.Y 2023-2024 international) and Classification of underwriting functions Financial of an investment Intermediaries/ house. Institutions  is a system of banking where banks are allowed to provide a Non - Depository variety of services to Depository Institutions Institutions their customers  are financial  are financial  Savings, checking, loans institutions that institutions that and investments primarily obtain do not primarily funds by accepting rely on deposits to Depository Institutions deposits from fund their Bank supervision and regulation are essential for individuals and operations. the maintenance of a balanced financial system. entities.  Instead, they Bank Supervision Bank Regulation  Mainly offer obtain funds  deals with  consists of the savings, deposits through other ensuring the administration of laws and loans means such as soundness and in the form of rules  Banks, Credit issuing securities, safety of banks. and regulations that unions borrowing from govern the conduct of ✧₊ ⁺ Ang pondo ay other financial banking and the ginagamit nila para institutions, or structure of the makapag operate ay offering insurance banking industry. galing sa deposits. products. Depository Institutions Depository Institutions Offers… The Philippine Deposit  Checking or current accounts/ demand deposits Insurance Corporation  Savings insures that the deposits in  Time deposits the depository institution, including commercial banks to Depository Institutions help depositors have peace  has the primary of mind knowing that their business to serve deposits are insured and  COMMERCIAL businesses, although therefore, safe in the banks. BANKS with banking ✧₊ ⁺ Protection for the (offerings deregulation, they depositors checking & have entered into the ✧₊ ⁺ ensure the deposits savings acc) consumer business as well  perform the more simple functions of Regulatory  Ordinary accepting deposits and Agencies in the Commercial granting loans. They do Philippines Banks not do investment functions.  Savings, checking, loans *and the provincial, city or local governments  are a combination of  Expanded commercial banks and Commercial an investment house. or Universal They perform expanded Banks commercial banking functions (domestic and 5 Banking and Financial Institutions 2nd Semester Notes | A.Y 2023-2024 M - Management  are also sometimes ✧₊ ⁺ quality of effectiveness of referred to as Savings and a bank’s leadership Loan Associations (S&Ls). ✧₊ ⁺ managing the bank ✧₊ ⁺ the clients are small ✧₊ ⁺ important to have a good business and individuals not management earning much  are banks specializing in A - Asset Quality granting mortgage loans ✧₊ ⁺ the quality of loans and other than the basic 1. Savings and investment function of accepting Mortgage deposits. Banks C - Capital Adequacy *Mortgage banks do not ✧₊ ⁺ cash reserve/ bank reserve accept deposits but offers loans ✧₊ ⁺ Bank Reserve - required na (buying house) and savings. mag stock ng money and not  also known as S&Ls, allowed for spending (for accumulate savings of fortuitous event or emergency their depositors/ funds) stockholders and use these Credit to accumulated savings, Standing R - Risk Management together with their 2. Savings and Measure ✧₊ ⁺ how the bank identifies capital for the loans that Loan for Banks and manage the risk they grant and for Associations investments in government O - Operating Result and private securities. ✧₊ ⁺ checking profitability & ✧₊ ⁺ may investing efficiency activities and make it as an additional fund para makapag C - Capital Adequacy grant ng loans A - Asset Quality  cater to the needs of M - Management agriculture and industry E - Earnings providing them reasonable ✧₊ ⁺ pasok sa operating result rate loans for medium and ✧₊ ⁺ checking ratio of income long term purposes. 3. Private and expenses ✧₊ ⁺ building infrastructure Development and starting a small business Banks L - Liquidity ✧₊ ⁺ for developing project ✧₊ ⁺ easily converted into cash (e.g. infrastracture) ✧₊ ⁺ seeks funds from PDB S - Sensitivity to Risk ✧₊ ⁺ supports small ✧₊ ⁺ risk managemet business owners / individual  are small thrift banks ✧₊ ⁺ Default Risk - the possibility of not fulfilling that cater to small, micro, one’s responsibility and cottage industries, hence the term Depository Institutions “micro”(solely for business 4. Microfinance  cater to the needs of the only) Thrift Banks households, agriculture, and  grant loans to small industry. businesses like sari-sari  Thrift  is a type of financial stores, small bakeries, and Banks institution that specializes cottage industries among in offering savings accounts others and originating home  are cooperatives organized mortgages for consumers. 5. Credit Unions by people from the same 6 Banking and Financial Institutions 2nd Semester Notes | A.Y 2023-2024 organization (whether  Important Terms formally or informally organized) like farmers, Face Value fishermen, teachers, ✧₊ ⁺ death benefit paid sailors, employees, and so to the beneficiaries when on. the insured person dies. Loan Value Depository Institutions ✧₊ ⁺ the amount of  has the role of promoting and money a policyholder can expanding the rural economy in borrow against the cash an orderly and effective value of a permanent life manner by providing basic insurance policy (like whole financial services to people in Rural and life or universal life rural communities. Cooperative insurance). ✧₊ ⁺ Examples: farmers / small Banks business A. Life Insurance Cash Surrender ✧₊ ⁺ Rural: Privately owned / ✧₊ ⁺ amount a policy profits are for owners holder receives if they ✧₊ ⁺ Cooperative: owned by the choose to cancel (surrender) members / profits are being shared their life insurance policy before death.  issue contracts that are Accident Insurance not deposits such as ✧₊ ⁺ provides coverage pension funds, life for injuries, disabilities, or insurance companies, and Non Depository death caused by accidents mutual funds Institutions (e.g., car crashes, workplace  finance companies like injuries, or falls). depository institutions ✧₊ ⁺ does not cover that perform financial deaths due to natural intermediation causes, illness, or pre- Are classified as: existing conditions.  are financial  offer protection against intermediaries that sell pure risk. insurance policies.  ensure against injury or ✧₊ ⁺ Policy Holders - they property loss resulting are paying premiums from accidents, work- 1. Life Insurance regularly, quarterly or related injuries, Companies annually malpractice, natural ✧₊ ⁺ the individuals na calamities, and at the may life insurance extreme, exotic ✧₊ ⁺ the claims of policy B. Property/ adventures as trips to holders are unpredictable Casualty the wild like African and unnoticed Insurance safaris.  gives protection against property losses to one’s business home, or car and against legal liability that may result from injury or damage to the property of others. 7 Banking and Financial Institutions 2nd Semester Notes | A.Y 2023-2024  Homeowners Insurance  sell contracts to provide ✧₊ ⁺ Covers home  Pension Fund income to policyholders damage and liability risks. Companies during their retirement years.  Auto Insurance  allow companies to ✧₊ ⁺ Covers vehicle purchase mutual funds  Mutual Fund damage, theft, and liability. that buy different Companies securities in the  Flood Insurance securities market ✧₊ ⁺ Covers losses due to  are financial flooding (not included in intermediaries that pool homeowners insurance). relatively small amounts 3. Investment of investors’ money to Banks/Houses/  Windstorm Insurance finance large portfolios of Companies ✧₊ ⁺ Covers damage from investments that justify hurricanes, tornadoes, and the cost of professional strong winds. management.  are profit-oriented  Umbrella Liability Policy institutions that borrow ✧₊ ⁺ Provides extra and lend funds to liability protection beyond households and standard policies. businesses. ✧₊ ⁺ a special type of  are categorized as: insurance that provides 4. Finance  Sales Finance Insurance coverage for over and Companies Companies Classifications above one’s insurance  Consumer ✧₊ ⁺ to cover the Finance additional expenses Companies  Commercial  Health Insurance Finance ✧₊ ⁺ covers medical Companies expenses and healthcare  act as a financial costs. intermediary in the sense 5. Securities that they look for  Professional Liability Dealers and investors or savings Insurance Brokers units to benefit the ✧₊ ⁺ Protects borrowers or deficit professionals from units. negligence or malpractice  are the agencies where claims. people and some small businesses “pawn” their  Credit Insurance 6. Pawnshops assets as collateral in ✧₊ ⁺ Covers loan exchange of an amount payments in case of death, much smaller than the disability, or job loss. value of the asset. ✧₊ ⁺ Protects borrowers  are corporations and lenders by covering loan organized for the payments if the borrower purpose of accepting and dies, becomes disabled, or 7. Trust executing trusts and loses their job. Companies and acting as trustee under  includes pension fund Departments wills as executor, or as 2. Fund Managers companies and mutual guardian. fund companies. 8 Banking and Financial Institutions 2nd Semester Notes | A.Y 2023-2024  distributing securities to ✧₊ ⁺ are individuals, investors, cost of institutions, or SEC registration, organizations that provide and the time and loans to borrowers in hassle of financial exchange for interest transaction 8. Lending payments and the Investors repayment of the principal amount. ✧₊ ⁺ ✧₊ ⁺ They act as creditors, earning income through interest and sometimes fees associated with the loan. Risks of Financial intermediation 1. Interest Rate / Market Price Risk 2. Reinvestment Risk 3. Refinancing Risk 4. Default/Credit Risk 5. Inflation/Purchasing Power Risk 6. Political Risk 7. Off-Balance Sheet Risk 8. Technology and Operation Risk 9. Liquidity Risk 10. Currency or Foreign Exchange Risk 11. County or Sovereign Risk Roles of Financial Intermediaries in Socio- economic Development Channeling Savings Providing Liquidity into Investment Risk Diversification Credit Allocation Promoting Financial Inclusion Economic Bases for Financial Intermediation Transaction Cost Information Gathering  refers to all the  Asymmetric fees, commissions, information occurs and other charges when buyers and paid when buying or sellers do not have selling securities the same including: research information. costs, costs of 9