OVERVIEW OF FINANCIAL MARKETS, INSTITUTIONS & MONEY (II)

OVERVIEW OF FINANCIAL MARKETS, INSTITUTIONS & MONEY (II)

1. COMMERCIAL BANKS

   • Largest and most diversified. highly regulated intermediaries.
   • Liabilities: Deposit accounts of various sorts and other source of funds.
   • Asset: Loans in all denominations to consumers, businesses, state & local governments.
   • Also engaged in other activities i,e, trust deparmetns, leasing operations, underwriting securitites.

2. NON-BANK FINANCIAL CORPORATIONS

   • BUILDING SOCIETIES
     • Authorised deposit-taking institutions (ADIs) - accept retail deposits & provide loans to clients with a traditional emphasis on home loan lending - structured as listed entities or mutuals.
     • Competitive advantage with highly regulated banks - disappeared when interest rate reforms - diminished i.e. some merged, some converted to banks, some collapsed.
   • CREDIT UNIONS
     • Take deposits and make loans for various personal finance applications - traditionally cooperative (membership is based on common bonds i.e. a trade union, local community, religious group, working for the same employer).
     • * Common bond requirement no longer exists in legal form.
   • MONEY MARKET CORPORATIONS
     • Also known as merchant/investment banks - Offer wide range of financial products inc. deposits and lending services.
       • Also provide specialist advice, underwriting facilities, trade in financial and exchange markets and funds management.
         • Competitive pressure forced commercial banks to diversify operations to maintain growth & revenues thus, investment banking groups were acquired by large banking groups.
   • FINANCE COMPANIES
     • Make loans to consumers and small business - do not accept savings deposits from consumers - Obtain funds by selling debentures and other capital market instruments i.e. commercial paper to investors..
       • Balance of funds comes from equity capital and long-term debt obligations.
       • Consumer F.C
         • Business F.C.
           • Sales F.C
             • Finance products sold by retail dealers.
           • Loans and leases to business.
         • Instalment loans to households.
       • Was associated with banks, now subsidiaries of manufacturers, also pastoral f.c. as well as general financiers.

3. OTHER FINANCIAL INSTITUTIONS

   • LIFE INSURANCE COMPANIES
     • Obtain funds by selling insurance policies that protect against loss of income from premature death or retirement - receive benefit i.e. risk protection + savings plan - able to invest primarily in higher-yielding, long-term assets i.e. corporate bonds and stocks.
   • GENERAL INSURANCE COMPANIES
     • Sell protection against loss of property from fire, theft, accident, negligence, etc. - Major funds: premium charged on insurance policies - Casualty insurance policies are pure risk-protection policies = no cash surrender value, no liquidity to policyholders. unpredictable cash out-flows.
       • Assets are short-term. highly marketable securities - Have substantial holdings of equity securities to offset the lower returns.
   • SUPERANNUATION FUNDS
     • Obtain funds from employer and employee contributions during their working years and provide financial resources to be used in retirement - invest such funds n variety of financial instruments i.e. corporate bonds and equities.
       • Help workers to plan their retirement years in an orderly and systematic manner - long term funds and outflow highly predictable therefore able to invest in higher-yielding long-term securities.
   • MANAGED FUNDS
     • Trusts; Sell equity share to investors and use the money they receive to purchase investment assets i.e. stocks and bonds - not fixed, fluctuates as price of stocks change.
       • Provide small investors with access to reduce investment risk -Results from diversification, economics in scale in transactions costs, professional financial managers.
     • Specialised in particular sectors.
   • SECURITISERS
     • -- Process of pooling assets and turning them into tradable security - enable value of asset to be realised immediately.
       • Obtain funds from capital markets by pooling and selling issued loans - generate income from this securities and receive interests.
         • Low operating costs - able to compete with much larger banks - provide interest rates and fees = high growth rates