Chapter 12: Financial Institutions and Intermediaries PDF

Financial institutions and intermediaries AN OVERVIEW CHAPTER 12  EXPECTED Learning outcomes 1. Explain what a financial institutions is 2. Know the channels through which savers and borrowers are matched in a financial system 3. Describe what a financial intermediary is 4. E...

Financial institutions and intermediaries AN OVERVIEW CHAPTER 12  EXPECTED Learning outcomes 1. Explain what a financial institutions is 2. Know the channels through which savers and borrowers are matched in a financial system 3. Describe what a financial intermediary is 4. Enumerate examples of depository institutions, contractual savings institutions, and investment intermediaries 5. Compare the function of a commercial bank with that of a universal bank 6. Discuss what are the functions of insurance companies and give the two segments of the insurance industry 7. Know the basic objective of Pensions Funds and distinguish between a Defined Contribution Plan and Defined Benefit Plan 8. Explain what investment intermediaries are and give examples of such 9. Know what Finance Companies are 10. Explain the three main types of Finance Companies 11. Know the primary assets and liabilities of the various Financial Institutions and Intermediaries 12 Financial institution Is a company engaged in the business of dealing with financial and monetary transaction such as deposits, loans, investments, and currency exchange 12 Financial institution Encompass a broad range of business operations within the financial services sector including banks, trust companies, insurance companies, brokerage forms and investment dealers Can operate at several scales from local community credit unions to international investment banks 12  THE FINANCIAL SYSTEM Matches saver and borrowers THROUGH TWO CHANNELS: 01. FINANCIAL MARKETS, AND 02. BANKS AND OTHER FINANCIAL INTERMEDIARIES 02 Financial intermediaries is a financial firm, such as a bank, that borrows funds from savers and lends them to borrowers 12  A Depository Institution Commercial Banks/ Universal Banks Savings and Loans Associations Mutual Savings Bank Credit Unions Basic Structure Contractual Savings of Financial B Institutions Institutions / Insurance companies Intermediaries Pension funds C Investment intermediaries Investment Banks Mutual funds Hedge funds Finance Companies 03 Money Market Mutual funds Commercial bank Depository are the most important intermediaries. Commercial banks Institutions play a key role in the financial system by taking in deposits from households and firms and investing most of these deposits, either by making loans to households and firms or by buying securities, such as government bond and securitized loans. Many firms rely on bank loans to meet their short term needs for credit Some firms rely on bank loans to meet their long-terms credit needs 06 Universal Bank Depository also referred to as a full service financial institutions Institutions provides a large array of services including those of commercial banks and investment banks The types of services offered Deposit accounts such as checking and savings Loans and credit asset and wealth management Buying and selling securities Financial and investment advice Insurance products 06 Universal Bank Depository Examples of universal banks BPI Institutions BDO Other depository institutions: savings and loans associations mutual savings bank credit unions these financial intermediaries are legally different from banks, although these “nonbanks” operate in a very similar way by taking in deposits and making loans. 06 There are financial intermediaries that Contractual receive payments from individuals as a result of a contract and uses these savings funds to make an investments. institutions Insurance Companies specialize in writing contracts to protect their policyholders from the risk of financial losses associated with particular events, such as automobile accidents and fire. collect premiums from policyholders which the companies then invest then obtain the funds necessary to pay claims to policyholders and to cover their other costs. 06 Insurance Companies Contractual Insurance industry has two segments: savings institutions Life insurance companies - sell policies to protect households against a loss of earning from a disability; retirement or death of the insurance person. (example: Insular Life Corporation) Property and casualty companies - sell policies to protect household and firms from the risks of illness, theft, fire, accidents and natural disasters. (Examples are Standard Insurance Company and Malayan Insurance Corporation) 06 Pension Fund Contractual is a financial intermediary that savings invests contributions of workers institutions and firms in stocks, bonds, and mortgages to provide pension benefit payments during workers' retirements. People can accumulate retirement savings in two ways: through pension funds sponsored by employers or through personal savings accounts. 06 Pension Fund Contractual Pension funds invest savings contributions from workers and institutions firms in stocks, bonds, and mortgages to earn the money necessary to pay pension benefit payments during worker's retirements. The SSS and government pension funds are important source of demand for financial securities. 06 Types of Pension Funds Plans Contractual Defined Contribution Plan savings Defined Contribution Plan has the following institutions features: a. Employer places contributions from employer into investments such as mutual funds, chosen by the employces. b. If the employee's investments are profitable, employer's income during retirement will be high. c. Most private employers' "Defined Contribution Plans" in the United States are 401 (k) plans. 06 Types of Pension Funds Plans Contractual Defined Benefit Plan savings Defined Benefit Plan has the following features: institutions a. An employer promises employees a particular peso benefit payment, based on each employee's earnings and years of service. b. If the funds in the pension plan exceed the amount promised, the excess remains with the employer managing the fund. c. If the funds in the pension plan are insufficient to pay the promised benefit, the plan is underfunded and the employer is liable for the different. 06 investment INTERMEDIARIES are financial firms that raise funds to invest in loans and securities. Important Investment Intermediaries Investment Banks they concentrate on providing advice to firms issuing stocks and bonds or considering mergers with other firms. they also engage in underwriting and propriety trading Important Investment Intermediaries Mutual Funds allow savers to purchase shares in portfolio of financial assets, including stocks, bonds, mortgages, and money market securities provide risk - sharing benefits by offering a diversified portfolio of assets and liquidity benefits because savers can easily sell the shares Types of Mutual Funds Closed-end mutual funds issues a fixed number of non redeemable shares, which investor may then rode in over-the counter markets just as stocks are traded Open-end mutual fund issues share that investors can redeem each day after the markets close for a price tied to the NAV (net asset value) Important Investment Intermediaries Hedge Funds are financial firms organized as a partnership of wealthy investors that make relatively high risk, speculative investments. Important Investment Intermediaries Finance Companies are nonbank financial intermediaries that raise funds through sales of commercial paper and other securites and use the funds to make small loans to households and firms  Types of FInance Companies Consumer finance companies make loans to enable consumers to buy cars, furnitute and appliances to finace home improvement and to refinance household debts Business finance companies are engaged in factoring that is, purchasing at a discount the accounts receivable of small business firms. Sales finance companies are affiliated with department stores and companies that manufacture and sell high-priced goods Important Investment Intermediaries Money Market Mutual Funds are new financial institutions that have the attributes of a mutual fund but also function to some extent as depositing institution because they offer deposit-type accounts  Primary Assets and Liabilities of Financial Intermediaries GUESS THE RIDDLE I manage cash, stocks, and bonds too, Investing wealth for growth in view. From accounts to loans, I oversee, What type of institution could I be? Clue: A place where you can save your money and earn interest. Financial Institution I stand between lender and borrower’s need, Facilitating funds with utmost speed. From loans to bonds, I help it flow, Without me, transactions would be slow. What am I? Clue: Someone who helps you buy and sell stocks Financial Intermediary  I’m the network where money flows, Through banks, markets, where value grows. From savings, loans, and equity too, I connect the many, both old and new. What am I? Clue: The interconnected system that allows money to move from savers to borrowers Financial System THANK YOU!