Financial Institutions (Group 3) PDF

BANKING AND FINANCIAL INSTITUTION FINANCIAL INSTITUTION A Report by Group 3  Define and understand what is financial institution and roles of 01 intermediaries Present different examples and...

BANKING AND FINANCIAL INSTITUTION FINANCIAL INSTITUTION A Report by Group 3  Define and understand what is financial institution and roles of 01 intermediaries Present different examples and advantages of having intermediaries in society Identify the Structure of Financial Industry OBJECTIVES 02 Present its component and its importance Understand information Asymmetries and Information Costs 03 Present the differences of the two topic, identify its advantages and disadvantages and identify the relativity. As we can see, the financial system has 4 components which are financial institutions, financial market, financial instruments and other financial services. Under financial institutions we have 4 main components, the regulatory, intermediaries, non-intermediaries and others (Kaushal, n.d.).  FINANCIAL INSTITUTIONS Financial institutions are business organizations which deal in lending and borrowing of funds. They serve as intermediates, assisting the country's financial system to work smoothly by offering various forms of financial services. Financial institutions mobilize and deposit savings. Financial institutions utilize the units' surplus savings by assigning them to profitable commercial operations. Financial institutions also give consultation services to entrepreneurs, businesses, and the government on a variety of crucial topics, ranging from restructuring to diversification strategies.  FINANCIAL INSTITUTIONS Financial institutions have four major components, with a greater emphasis on regulatory and intermediary services. The first is the regulatory bodies, which are formed by governments or other organizations to regulate the operation and fairness of financial markets and institutions that conduct financial transactions. The purpose of regulation is to prevent and identify fraud, maintain market efficiency and transparency, and ensure that consumers and clients are treated fairly and honestly.  FINANCIAL INSTITUTIONS Second is the Intermediaries composed of 2 types of institutions which are Banking and Non-banking institutions. A financial intermediary refers to an institution that acts as a middleman between two parties in order to facilitate a financial transaction. The institutions that are commonly referred to as financial intermediaries include commercial banks, investment banks, mutual funds, and pension funds. They reallocate uninvested capital to productive sectors of the economy through debts and equity.  NON-BANKING FINANCIAL INSTITUTIONS ❖ Non-banking financial institutions (NBFCs) are companies that provide financial services such as lending, insurance, and investment banking but that are not regulated as banks. This means that they have a different set of rules and regulations to follow. Types of Non-banking Financial Institutions 1. Insurance companies: These companies sell insurance policies to individuals and businesses. The policies can provide coverage for things like car accidents, medical expenses, or property damage. 2. Investment banks: These banks help companies raise money by issuing and selling securities. They also provide advice on mergers and acquisitions, and they trade stocks and bonds. 3. Pension funds: These funds provide retirement income for workers. The money is invested in stocks, bonds, and other assets. 4. Mutual funds: These funds pool money from investors and invest it in a portfolio of stocks, bonds, and other assets. 5. Hedge funds: These funds are private investment partnerships that use a variety of investment strategies to make money. 6. Private equity firms: These firms invest in private companies and help them grow. They may also take the companies public. 7. Venture capital firms: These firms invest in early-stage companies with high growth potential.  Role of Financial Intermediaries Financial intermediaries are institutions or individuals that facilitate transactions between parties in financial markets. Their primary roles include: 1. Channeling Funds: They connect savers and borrowers, helping to allocate resources efficiently. For instance, banks take deposits from individuals and lend them to businesses or individuals in need of capital. 2. Risk Management: They help manage and diversify risk. Insurance companies, for example, pool risk from many individuals and businesses, offering protection against financial losses. 3. Providing Information: They offer valuable information and analysis about investments and financial products, aiding in decision-making. 4. Liquidity: They provide liquidity by making it easier for individuals and businesses to convert assets into cash quickly. 5. Transaction Efficiency: They reduce transaction costs by facilitating and streamlining financial transactions and services.  FUNCTIONS OF FINANCIAL INTERMEDIARIES Asset storage Commercial banks provide safe storage for both cash (notes and coins), as well as precious metals such as gold and silver. Depositors are issued deposit cards, deposit slips, checks, and credit cards that they can use to access their funds. The bank also provides depositors with records of withdrawals, deposits, and direct payments they have authorized. To ensure the depositors’ funds are safe, the Federal Deposit Insurance Corporation (FDIC) requires deposit-taking financial intermediaries to insure the funds deposited with them.  FUNCTIONS OF FINANCIAL INTERMEDIARIES Providing loans Advancing short-term and long-term loans is the core business of financial intermediaries. They channel funds from depositors with surplus cash to individuals who are looking to borrow money. Borrowers typically take out loans to purchase capital-intensive assets such as business premises, automobiles, and factory equipment. Intermediaries advance the loans at interest, some of which they pay the depositors whose funds have been used. The remaining amount of interest is retained as profits. Borrowers undergo screening to determine their creditworthiness and their ability to repay the loan.  FUNCTIONS OF FINANCIAL INTERMEDIARIES Investments Some financial intermediaries, such as mutual funds and investment banks, employ in-house investment specialists who help clients grow their investments. The firms leverage their industry experience and dozens of investment portfolios to find the right investments that maximize returns and reduce risk. The types of investments range from stocks to real estate, Treasury bills, and financial derivatives. Sometimes, intermediaries invest their clients’ funds and pay them an annual interest for a pre-agreed period of time. Apart from managing client funds, they also provide investment and financial advice to help them choose ideal investments. Examples of Financial Intermediaries BANK CREDIT UNION MUTUAL FUNDS A credit union is a type of bank A bank is a financial intermediary Mutual funds pool savings from that is member-owned. It that is licensed to accept individual investors. They are operates on the principle of deposits from the public and managed by fund managers who helping members access credit create credit products for identify investments with the at competitive rates. Unlike borrowers. Banks are highly potential of earning a high rate of banks, credit unions are regulated by governments, due return and who allocate the established to serve their to the role they play in economic shareholders’ funds to the members and not necessarily for stability. They are also subject to various investments. This profit purposes. Credit unions minimum capital requirements enables individual investors to claim to provide a wide variety of based on a set of international benefit from returns that they loan and saving products at a standards known as the Basel would not have earned had they relatively lower price than other Accords. invested independently. financial institutions offer. They are governed by a board of directors, who are elected by the members.  Structure of Financial Industry  DIFFERENT STRUCTURES OF FINANCIAL INSTITUTIONS Depository Non-depository Institutions Institutions These institutions accept These institutions do not deposits from individuals and accept deposits but provide businesses, which can then be other financial services like used for loans and other investment management, financial services. The funds insurance, or loans. They often deposited are generally deal with investments, asset insured and can be withdrawn management, or financing. by the depositors.  Types of Depository Institutions Commercial Banks: These are the most common depository institutions. They offer a wide range of services like accepting deposits, providing loans, and offering checking and savings accounts. Examples in the Philippines include BDO, Metrobank, and BPI. Savings and Loan Associations (Thrift Banks): These focus on accepting savings deposits and making mortgage and personal loans. They are often smaller and more community-focused compared to commercial banks. Rural Banks: These banks primarily serve rural areas, providing credit to farmers, small businesses, and rural communities. They promote financial inclusion in less- developed areas. Credit Unions: These are member-owned financial cooperatives that offer similar services to banks but with a focus on serving the financial needs of their members..  Types of Non-depository Institutions Insurance Companies: Provide life, health, and property insurance, helping individuals and businesses manage risk. Examples in the Philippines include Sun Life and Philam Life. Investment Firms: These firms manage portfolios of stocks, bonds, and other securities for investors. They include mutual funds, asset management firms, and brokerage companies. Finance Companies: These firms provide loans and credit to individuals and businesses but do not accept deposits. They are typically focused on specific financing needs, like leasing or consumer credit. Mutual Funds and UITFs (Unit Investment Trust Funds): These institutions pool money from many investors to invest in a diversified portfolio of securities. They provide investment services without directly taking deposits. Pawnshops: Offer short-term loans secured by personal assets like jewelry or electronics.  DIFFERENT STRUCTURES OF FINANCIAL INSTITUTIONS Capital Regulatory and Markets Supervisory These are essential to the Agencies country's financial system, providing avenues for These agencies play crucial businesses, governments, and roles in maintaining financial individuals to raise and invest stability, protecting investors capital. and consumers, and ensuring the integrity of the financial system in the Philippine  Capital Markets 1. Stock Markets are where companies list and sell shares of ownership (equity) to the public. Investors buy these shares, becoming part-owners of the company, which can result in dividends and capital appreciation if the company's value grows. Primary Stock Exchange is the Philippine Stock Exchange (PSE): main platform for stock trading in the country. It facilitates the buying and selling of stocks issued by publicly listed companies. 2. Bond Markets are platforms where companies and governments issue debt securities, allowing them to borrow money from investors in exchange for periodic interest payments and repayment of the principal at maturity. Bonds are seen as less risky investments compared to stocks but typically offer lower returns.  Regulatory and Supervisory Agencies Bangko Sentral ng Pilipinas (BSP): The BSP is the central bank of the Philippines, responsible for regulating the banking sector, managing monetary policy, and ensuring the stability of the financial system. Securities and Exchange Commission (SEC): The SEC regulates the capital markets, ensuring that companies comply with laws governing securities trading, corporate governance, and investor protection. Insurance Commission (IC): The IC regulates the insurance sector, ensuring that insurance companies meet financial standards and protect policyholders’ interests. Philippine Deposit Insurance Corporation (PDIC): The PDIC provides deposit insurance, protecting depositors in the event that a bank fails.  DIFFERENT STRUCTURES OF FINANCIAL INSTITUTIONS FinTech Development Companies Finance Fintech (financial technology) Institutions companies leverage technology to offer financial These are financial institutions services and solutions. They established to provide innovate by using software, financing and support for apps, and other technologies projects and enterprises that to improve and automate the promote economic delivery of financial services. development and contribute to the growth of specific sectors, often in underserved or emerging markets.  FinTech Companies The rise of financial technology (FinTech) companies has significantly transformed the financial industry in the Philippines. Companies like GCash, PayMaya, and Coins.ph offer digital wallets, online payments, and mobile banking services, making financial services more accessible, especially to the unbanked population. Peer-to-Peer Lending Platforms: Platforms like Tala and Cashalo provide quick, short-term loans through mobile apps, bypassing traditional banking systems.  Development Finance Institutions Microfinance Institutions: Provide small-scale financial services, including loans and savings products, primarily to low-income individuals or small businesses. Examples: CARD Bank, ASA Philippines and TSPI (Tulay sa Pag-unlad Inc.) Development Bank of the Philippines (DBP): This government-owned bank provides financial services geared toward infrastructure development, agricultural projects, and other priority sectors. Land Bank of the Philippines (Landbank): Another government financial institution that focuses on financing agricultural and rural development projects, supporting the government’s economic and social goals. Information Asymmetries and Information Costs Asymmetric information "Asymmetric information" refers to when one side in a transaction has more information than the other. In some transactions, sellers may take advantage of customers due to asymmetric information, when the vendor has more knowledge about the product than the buyer. It is also possible to have the reverse. In a healthy market economy, skilled labor with asymmetric information is valued since it leads to increased productivity and added value for workers in other trades.  ADVANTAGES AND DISADVANTAGES OF ASYMMETRIC INFORMATION  Advantage Asymmetric information is not always a negative thing. Indeed, a strong market economy seeks to increase asymmetrical information. Workers who try to become progressively specialized in their chosen professions become more productive and, as a result, may give more value to workers in other industries. One response to ever-increasing asymmetric information is for workers to study various fields rather than focusing on those where they can add the greatest value. However, this is an unworkable approach, with significant opportunity costs and the possibility for lower aggregate production, lowering living standards. Disadvantage In certain cases, asymmetric information can have near-fraudulent implications, such as adverse selection, which describes a situation in which an insurance company faces the possibility of excessive loss owing to a risk that was not disclosed at the time of policy sale. In some asymmetric information models, one party can be punished for contract breaches, while the other cannot.  INFORMATION COSTS These are the costs connected with gathering necessary information and meeting with the agents who will handle the transaction. The stock exchange is one such example, as it connects buyers and sellers of financial assets. The stockbroker's fee is an example of an information transaction cost. In a financial system, information costs are the fees involved with gathering, processing, and interpreting information required to make educated financial decisions. These expenses emerge because knowledge is not freely available, and acquiring it costs resources such as time, effort, and money. Information costs in financial markets can have an impact on market efficiency because well-educated investors are better suited to make selections that represent the underlying worth of assets, whereas poorly informed investors may make suboptimal choices. For example, before purchasing a stock, an investor must acquire knowledge on the company's financial health, market circumstances, and potential hazards. The expenses involved in obtaining this information, such as paying for research reports, doing due diligence, or subscribing to financial news services, are termed information costs. RELATIVITY BETWEEN ASYMMETRIC INFORMATION AND INFORMATION COSTS The degree of asymmetry in information High information costs can lead to greater between parties is often influenced by the information asymmetry because those who costs of acquiring information. When can afford to gather more information gain information is costly to obtain, it can a significant advantage over those who increase the asymmetry, as not all parties cannot. may be willing or able to incur these costs. In financial markets, investors might face Conversely, reducing information costs high costs to obtain detailed information (e.g., through better technology or about a company's performance. Those transparency regulations) can help level who can afford these costs might have the playing field, reducing the degree of better insights and thus make more asymmetric information. informed decisions, leading to an imbalance compared to less informed investors. REFERENCES  Salvino, Bianca Nicolai R. Group 3 Members Jacobe, Jaycel Mae M. GET TO KNOW THE REPORTERS Fabia, Mark Jayson G.