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Financial Institutions and Intermediaries (Chapter 12)

Financial institutions are companies involved in financial transactions, including banks, insurance companies, and investment firms. They facilitate the flow of funds from savers to borrowers through financial markets and intermediaries. The document categorizes financial intermediaries into depository institutions, contractual savings institutions, and investment intermediaries, detailing their functions and types.

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35 views17 pages

Financial Institutions and Intermediaries (Chapter 12)

Financial institutions are companies involved in financial transactions, including banks, insurance companies, and investment firms. They facilitate the flow of funds from savers to borrowers through financial markets and intermediaries. The document categorizes financial intermediaries into depository institutions, contractual savings institutions, and investment intermediaries, detailing their functions and types.

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Franze Cinco
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CHPATER 12

A financial institution is a company engaged in the business of dealing with financial and
monetary transactions such as deposits, loans, investments, and currency exchange.
These institutions
FINANCIAL include banks, insurance companies, investment firms, and brokerage
SECURITY
firms. Financial institutions can operate at several scales from local community credit
unions to international investment banks.

The financial system matches savers and borrowers through two channels:
1. financial markets, and
2. banks and other financial intermediaries
These two channels differ in how funds flow from savers to borrowers. Funds flow from
lenders to borrowers directly through financial markets such as the New York Stock
Exchange and Philippine Stock Exchange or indirectly through financial intermediaries,
such as banks.
A financial intermediary is a financial firm, such as a bank, that borrows funds from savers
and lends them to borrowers.

BASIC STRUCTURE OF FINANCIAL INSTITUTIONS / INTERMEDIARIES


A. Depository Institutions B. Contractual Savings Institutions C. Investment Intermediaries
1. Commercial Banks / Universal Banks 1. Insurance companies 1. Investment Banks
2. Savings And Loans Associations 2. Pension funds 2. Mutual Funds
3. Mutual Savings Bank 3. Hedge Funds
4. Credit Union 4. Finance Companies
5. Money Market Mutual Funds
COMMERCIAL BANKS/ SAVINGS AND LOAN
UNIVERSAL BANKS ASSOCIATIONS
Commercial banks are the most important
A financial institution that primarily accepts
intermediaries. Commercial banks play a key role
deposits and provides home loans, with the goal
in the financial system by taking in deposits from
of promoting homeownership. S&Ls are
households and firms and investing most of those
regulated by federal or state authorities.
deposits, either by making loans to households
and firms or by buying securities, such as CREDIT UNION
government bonds, or securitized loans.

Universal bank. Also referred to as a full-service


financial institutions, a universal bank provides a
large array of services including those of
commercial banks and investment banks.
MUTUAL SAVINGS BANK CREDIT UNION

A financial institution owned by its depositors, A not-for-profit, cooperative financial institution


which reinvests its profits to benefit those owned by its members, offering services such as
depositors. Mutual savings banks offer savings savings accounts, loans, and lower fees. Credit
and loan services and are regulated similarly to unions are regulated by the National Credit
S&Ls. Union Administration (NCUA) and focus on
CREDIT UNION
serving local communities or specific groups.
These are financial intermediaries that receive
payments from individual as a result of a contract and
uses the funds to make investments.

INSURANCE COMPANIES
Insurance companies specialize in writing contracts to
protect their policyholders from the risk of financial losses
associated with particular events, such as automobile
accidents or fires.
The insurance industry has two segments:
Life Insurance Companies
Property and Casualty Companies
PENSION FUNDS
Pension fund is a financial intermediary that invests
contributions of workers and firms in stocks, bonds, and
mortgages to provide pension benefit payments during
workers' retirements.

TYPES OF PENSION FUNDS PLAN


Defined Contribution Plan
Defined Benefit Plan
Investment intermediaries are financial firms that raise funds to invest in loans and
securities. The most important investment intermediaries are investment banks,
mutual funds, hedge funds finance companies and money market mutual fund.

INVESTMENT BANKS
Investment banks, such as Goldman, Sachs and Morgan Stanley, Merrill Lynch differ
from commercial banks in that they do not take in deposits and until very recently
rarely lent directly to households.
MUTUAL FUNDS
These financial intermediaries allow savers to purchase shares in portfolio of
financial assets, including stocks, bonds, mortgages, and money market securities.
Mutual funds offer savers the advantage of reducing transactions costs.

TYPES OF MUTUAL FUNDS:


Closed-end mutual funds Open-end mutual fund
This mutual fund issues a fixed number of This mutual fund issues share that investors
nonredeemable shares, which investors may can redeem each day after the markets close
then rode in over-the counter markets just as for a price tied to the NAV.
stocks are traded. The price of a share
fluctuates with the market value of the assets
HEDGE FUNDS
Hedge funds are financial firms organized as a partnership of wealthy investors that
make relatively high risk, speculative investments. Hedge funds are similar to mutual
funds in that they accept money from investors and use the funds to buy a portfolio
of assets. However, a hedge fund typically has no more than 99 investors, all of
whom are wealthy individuals or institutions such as pension funds. Hedge funds
usually make riskier investments than do mutual funds, and they charge investors
much higher fees.
FINANCE COMPANIES
Finance companies are nonbank financial intermediaries that raise funds through
sales of commercial paper and other securities and use the funds to make small
loans to households and firms. Finance companies raise funds by selling commercial
paper (a short-term debt investment) and by issuing stocks and bonds. They lend
these funds to consumers, who make purchases of such items as cars, furniture and
home improvements, and to small business. Some finance companies are organized
by a parent corporation to help sell its product.
CONSUMER FINANCE BUSINESS FINANCE SALES FINANCE
COMPANIES COMPANIES COMPANIES
These companies make loans to These companies are engaged in These companies are affiliated
enable consumers to buy cars, factoring that is, purchasing at a with department stores and
furniture and appliances; to discount the accounts companies that manufacture
finance home improvement and receivable of small business and sell high-priced goods.
to refinance household debts firms.
MONEY MARKET MUTUAL FUNDS.
These are relatively new financial institutions that have the attributes of a mutual
fund but also function to some extent as a depositing institution because they offer
deposit-type accounts. Like most mutual funds, they sell shares to acquire funds
that are then used to buy money market instruments that are both safe and very
liquid. The interest on these assets is then paid out to the shareholders. These money
market mutual funds invest exclusively in short-term assets, such as treasury bills,
negotiable certificates of deposit and commercial paper.
The previous section discusses how financial intermediaries play an important role in the
economy. Now we look at the principal financial intermediaries and how they perform the
intermediation function. They fall into three categories: depository institutions (banks),
contractual savings institutions, and investment intermediaries.
GROUP 1

THANK YOU

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