1.4 Financial Institutions
- \(FI\)s: Financial Institutions are
- Facilitators of financial services
- Commercial banks etc.
- Establishments that completes and facilitates monetary transactions, such as loans, mortgages and deposits.
- Scope of FI
- Acceptance of deposits: (most conventional scope)
- Banking Regulation Act 1949: "Accepting deposits, should be repayable in the form of cheques, drafts and audits"
- Lending Loans: Education, house, vehicle.
- Help in mergers and acquisitions:
- Investment banks caters to multiple companies
- Helps in this complex situation
- Cover risk of diverse nature
- Insurance: transfer the financial burden from individual or business to the company
- Purchase and Sale of Securities
- Brokerage firms: act as intermediaries (paperwork, dividend payments)
- Main source of revenue of the bank
- Find a match between buyer and seller
- Economic Stability
- Influence interest rates, undertake open market operations (Central bank)
- Keeping unemployment at low level
- Uphold the value of currency
- Categories of FIs
- Commercial Banks
- Accepting deposits
- lending out loans
- Equally for business and individuals (irrespective of scale)
- Public, private or regional
- Investment bank
- Highly complex and experts in the category
- Services:
- Advisory Mergers & Acquisitions
- IPO issuing assistance
- Help even govt, in issue securities, trade securities and manage them
- Insurance Companies
- Service to mitigate risk: health, property and life.
- Charge insurance payments: also makes profits
- Credit Unions
- Unique in their own way, for not-for-profit motives
- Accounts Checking, Extending loans
- Access to low rate interest. Higher benefits
- e.g. Navy Federal Credit Union, state Employee's credit union
- Saving and Loan Associations
- Originated during the great depression
- Specialized in residential mortgages (home buyers)
- Brokerage funds
- Purchase and sale of securities:
- bonds, mutual funds and stocks
- Investment, obtaining loan, purchase real estate
- connects the buyer and seller so that transaction is possible
- Asset Management companies
- Mutual funds
- pension funds
- hedge funds
- Mortgage companies
- specialize in servicing mortgage loans
- issues its own mortgages to homebuyers. Direct lenders
- Doesn't offer any other banking services (e.g. investments)
- do not offer products from other companies
- Central Bank
- supervise and regulate monetary policy
- oversee the banking sector
- lender of last resort
- manage economic fluctuations for price stability
- Set inflation targets (development and )
- Adjust supply of money.
- By Purchasing and selling their securities in the open market
- Open market operations influence short-term interest rates => influence longer-term rates and econ activity
- MP eases: reduced interest rates
- MP tightens: interest rates rise
- Role of FIs (in an economy)
- Facilitate transactions
- loans, deposits and investments
- link between \(H\), \(B\) and \(G\)
- Mobilize savings
- prefer the money to be kept in the bank (interest rates)
- match the needs of savers and buyers
- savings utilized into productive investments (continuous flow of money)
- Providing credit
- Credit for personal and business needs
- Streamline econ activities
- prevent downfall
- Risk management
- life, health and property
- Insurance company as an intermediary
- insurance policies to the individuals
- accidents, illness and disasters
- Capital formation
- Channelize savings into investments
- role of investment banks
- Economic stability
- control inflation
- manage interest rates
- role of central bank
- Facilitating trade
- Currency conversion
- Control exchange rate risks
- Support to SMEs
- meet their SM financial needs
- SME play a key contrib to econ development
- Financial Advice
- To make well-informed decisions
- Retirement plan
- Investment decisions
- Government agent
- Develop and execute economic reforms, policies and programs as agents