Financial Markets and Institutions: Financial Intermediaries

Extract

[...] Credit unions: member-owned, not for profit institutions providing savings, credits. CSI life insurance companies: protection against adverse events fire and casualty insurance companies: funds from policy premiums, must invest in liquid government and corporate securities because loss events hard to predict pension and government retirement funds: hosted by corporations, invest in corporate securities INVESTMENT INTERMEDIARIES finance companies: sell commercial papers, issue bonds to raise funds to lend to consumers mutual funds: sell shares to individual investors and purchase stock and bonds money market mutual funds: sell deposit-like shares to investors and buy high liquid short term hedge funds: similar to mutual funds but few wealthy investments and riskier investment banks: advise companies on securities to issue Benefits of indirect finance: Transaction costs: economics of scale: transaction cost per $ decreases as the size of the transaction increases Liquidity services: easier for customers to conduct transactions Risk sharing: creation and selling of assets that people are comfortable with Diversification: investing in a collection of assets with lower overall risk. [...]

[...] After transaction occurs: Moral Hazard: borrower might engage in undesirable activities, lowers the chances that the loan will be repaid. Financial intermediaries are able to lower the production cost of information by using it for multiple service = economies of scope. But that may lead to conflicts of interest. Risks in the bank industry: Credit risk: potential that a borrower will fail to meet its obligations in accordance with agreed terms. Market risk: - interest rate risk: losses due to fluctuations in interest rates. [...]

[...] Financial Markets and Institutions: Financial Intermediaries Interest rate: cost of borrowing funds, percentage of the amount borrowed. Foreign exchange rate: units of foreign currency. Financial liability: financial claim owed by a person/firm. Financial intermediary: financial firm that borrows funds from savers and lends to borrowers. There are 3 categories: Banks: financial institution that accepts deposits and make loans Contractual Saving Institutions (CSI) Investment intermediaries BANKS: commercial banks offer saving accounts; checking accounts; certificates of deposit . [...]