Financial Institution and Intermediaries Chapter 2 Reviewer PDF

FINANCIAL INSTITUTION AND INTERMEDIARIES FINANCIAL INTERMEDIARIES Financial institution that acct as a bridge between investors or savers (surplus units or SUs) and borrowers or security issuers (deficit unit DUs). Helps sell the primary securities Iss...

FINANCIAL INSTITUTION AND INTERMEDIARIES FINANCIAL INTERMEDIARIES Financial institution that acct as a bridge between investors or savers (surplus units or SUs) and borrowers or security issuers (deficit unit DUs). Helps sell the primary securities Issue their own financial instruments (secondary securities) DIRECT FINANCE WITH THE USE OF MARKET SPECIALIST FINACIAL INTERMEDIARIES ARE DIFFERENT FROM OTHER BUSINESS DEPOSITORY INSTITUTIONS Assets Liabilities & Equity Loans Deposits NON-FINANCIAL/OTHER FINANCIAL INSTITUTIONS Assets Liabilities & Equity INDIRECT FINANCE Deposits Loans Like the relationship between the depositor of a bank and the borrowers of the same bank DIRECT FINANCE Borrower-lender relationship or transaction Does not involve any financial intermediary When a direct or primary security flows from the borrowing unit to the lending or investing unit CLASSIFICATION OF FINANCIAL Bank supervision and regulation INTERMEDIARIES/ INSTITUTION are essential for the maintenance of a balanced financial system. DEPOSITORY INSTITUTIONS Financial institutions that primarily BANK BANK obtain funds by accepting SUPERVISION REGULATION deposits from individuals and entities - Deals with - Consists of the It offers; ensuring the administration ✓ checking or current soundness and of laws in the accounts/demand deposits, safety of banks form of rules and regulations ✓ savings, that govern the ✓ time deposit conduct of banking and the structure of the ❖ COMMERCIAL BANKS banking - Primary business to serve industry businesses, although with banking deregulation, they have entered into PDIC (PHILIPPINE DEPOSITS the consumer business as well INSURANCE CORPORATION) (thismatter.com) - Insures that the deposit in the 1. ORDINARY COMMERCIAL depository institution, including BANKS – perform the more commercial banks to help depositors simple functions of accepting have peace of mind knowing that their deposits and granting loans. They deposits are insured and therefore, do not do investments functions. safe in the banks. 2. EXPANDED COMMERCIAL OR UNIVERSIAL BANKS – REGULATORY AGENCIES IN THE combination of commercial banks PHILIPPINES and an investments house. They perform expanded commercial banking functions (domestic and international) and underwriting functions of an investment house. o A system of banking where banks are allowed to provide variety of services to their customers (thefreedictionary.com) CREDIT STANDING MEASURE FOR BANKS Management Asset Quality investments in government and private securities. Capital Adequacy Risk Management 3. PRIVATE DEVELIPMENT BANKS- cater to the needs of Operating Result agriculture and industry providing them reasonable rate loans for medium and long term purposes. Capital Adequacy Asset Quality 4. MICROFINANCE THRIFT BANKS- small thrift banks that Management carter to small, micro, and cottage Earnings industries, hence the term “micro” o Grant loans to small businesses Liquidity like sari-sari stores, small Sensitivity to Risk bakeries, and cottage industries among others. 5. CREDIT UNIONS- are ❖ THRIFT BANKS cooperatives organized by people - Carter to the needs of the from the same organization households, agriculture, and industry (whether formally or informally - Type of financial institutions that organized) like farmers, specializes in offering savings fishermen, teachers, sailors, accounts and originating home employees, and so on. mortgaged for consumers - Also sometimes referred to as Savings and Loan Association (S&Ls) - ❖ RURAL AND COOPERATIVE 1. SAVINGS AND MORTGAGE BANKS BANKS- banks specializing in - Has the role of promoting and granting mortgage loans oher than expanding the rural economy in an the basic function of accepting orderly and effective manner by deposits providing basic financial services to o Mortgage banks do not accept people in rural communities. deposits but offers loans 2. SAVINGS AND LOAN NON-DEPOSITORY INSTITUTIONS ASSOCIATIONS- also known as Issue contracts that are not S&Ls, accumulate savings of their deposits such as pension depositors/stockholders and use funds, life insurance these to accumulated savings, companies, and mutual funds together with their capital for the Finance companies like loans that they grant and for depository institutions that  perform financial 2) FUND MANAGERS- includes intermediation pension fund companies and Are classified as: mutual companies 1) INSURANCE COMPANIES a) PENSION FUND COMPANIES- A. LIFE INSURANCE- financial sell contracts to provide income intermediaries that sell to policy holders during their insurance policies. retirement years. IMPORTANT TERMS b) MUTUAL FUND COMPANIES- ▪ Face Value allow companies to purchase ▪ Loan Value mutual funds that buy different ▪ Cash Surrender securities in the securities ▪ Accident Insurance market B. PROPERTY/CASUALTY INSURANCE COMPANIES- 3) INVESTMENT BANKS/ HOUSE/ offer protection against pure COMPANIES - financial risk intermediaries that pool relatively o Insure against injury or property small amounts of investors’ loss resulting from accidents, money to finance large portfolios work-related, injuries, of investments that justify the cost malpractice, natural calamities, of professional management. and at the extreme, exotic adventures as trips to the wild like African safaris. 4) FINANCE COMPANIES – are o Gives protection against property profit-oriented institutions that losses to one’s business home, or borrow and lend funds to car and against legal liability that households and businesses. may result from injury or damage o Are categorized as: to the property of others. ✓ Sales Finance o Insurance Classification Companies ✓ Homeowners Insurance ✓ Consumer Finance ✓ Auto Insurance Companies ✓ Flood Insurance ✓ Commercial Finance ✓ Windstorm Insurance Companies ✓ Umbrella Liability Policy ✓ Health Insurance ✓ Professional Liability 5) SECURITIES DEALERS AND Insurance BROKERS – act as a financial ✓ Credit Insurance intermediary in the sense that they look for investors or saving units to benefit the borrowers or deficit units.  ROLE OF FINANCIAL INTERMEDIARIES IN SOCIO- 6) PAWNSHOP – the agencies ECONOMIC DEVELOPMENT where people and some small businesses “pawn” their assets as Channeling Saving into Investments collateral in exchange of an Providing Liquidity amount much smaller than the Risk Diversification value of the asset. Credit Allocation Promoting Financial Inclusion 7) TRUST COMPANNIES AND DEPARTMENTS – corporations ECONOMIC BASES FOR FINANCIAL organized for the purpose of INTERMEDIATION accepting and executing trusts and acting as trustee under wills TRANSACTION COST as executor, or as guardian. - Refers to all the fees, commissions, and other charges paid when buying or selling securities including: 8) LENDING INVESTORS – research costs, costs of distributing securities to investors, cost of SEC registration, and the time and hassle of financial transaction. INFORMATION GATHERING - Asymmetric information occurs when RISKS OF FINANCIAL buyers and sellers do not have the INTERMEDIATION same information. 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