Lecture notes

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Lecture notes

  1. 1. Other Institutions Economics 71a Spring 2007 Mayo, Chapter 4 Lecture notes 2.4
  2. 2. Institutions <ul><li>Commercial banks </li></ul><ul><li>Investment managers </li></ul><ul><ul><li>Mutual funds </li></ul></ul><ul><ul><li>Pension funds </li></ul></ul><ul><ul><li>Hedge funds </li></ul></ul><ul><li>Money market mutual funds </li></ul><ul><li>Insurance companies </li></ul><ul><li>Others </li></ul>
  3. 3. Commercial Banks <ul><li>Consumers </li></ul><ul><ul><li>Deposits/savings </li></ul></ul><ul><ul><li>Lending/transactions </li></ul></ul><ul><ul><ul><li>Consumer loans </li></ul></ul></ul><ul><ul><ul><li>Home mortgages </li></ul></ul></ul><ul><ul><ul><li>Checking accounts </li></ul></ul></ul><ul><ul><ul><li>Credit cards </li></ul></ul></ul><ul><ul><ul><li>Debit cards </li></ul></ul></ul><ul><ul><ul><li>Foreign exchange </li></ul></ul></ul><ul><ul><ul><li>Brokerage (recent) </li></ul></ul></ul>
  4. 4. Commercial Banks <ul><li>Firms </li></ul><ul><ul><li>Cash management </li></ul></ul><ul><ul><li>Lines of credit </li></ul></ul><ul><ul><ul><li>Loan of varying magnitude </li></ul></ul></ul><ul><ul><ul><li>Similar to credit card </li></ul></ul></ul><ul><ul><li>Bank loans (term loans) </li></ul></ul>
  5. 5. Commercial Banks <ul><li>Intermediary roles </li></ul><ul><ul><li>Between lenders and borrowers </li></ul></ul><ul><ul><li>Repackaging financial products </li></ul></ul><ul><li>Regulatory environment </li></ul><ul><ul><li>Key aspect of monetary policy </li></ul></ul><ul><ul><li>Federal Deposit Insurance Corporation (FDIC) </li></ul></ul><ul><ul><li>Federal Reserve System </li></ul></ul>
  6. 6. Related Institutions <ul><li>Thrifts (S&L’s) </li></ul><ul><li>Credit unions </li></ul>
  7. 7. Bank Regulations <ul><li>Reserve requirements </li></ul><ul><ul><li>Deposits with specific banks </li></ul></ul><ul><ul><li>Cash </li></ul></ul><ul><li>Deposit insurance/FDIC </li></ul><ul><ul><li>$100,000 per account limit </li></ul></ul><ul><li>Bank failures and bank runs </li></ul>
  8. 8. Bank/Investment Bank Separation <ul><li>Banks versus Investment Banks </li></ul><ul><ul><li>The Glass-Steagall act (1933) </li></ul></ul><ul><ul><li>Repealed 1999 </li></ul></ul><ul><li>Now separation is not required </li></ul><ul><li>Example: </li></ul><ul><ul><li>Citigroup </li></ul></ul>
  9. 9. Investment Managers <ul><li>Mutual funds </li></ul><ul><li>Pension funds </li></ul><ul><li>Hedge funds </li></ul>
  10. 10. Mutual Funds <ul><li>Function </li></ul><ul><ul><li>Consumer investments -> Firms </li></ul></ul><ul><li>Types </li></ul><ul><ul><li>Stock (invest in stock market portfolios) </li></ul></ul><ul><ul><li>Money market (short term lending to firms) </li></ul></ul><ul><ul><li>Bond </li></ul></ul><ul><ul><li>Real Estate </li></ul></ul>
  11. 11. Mutual Funds <ul><li>Allow consumers to better diversify </li></ul><ul><li>Gather and process investment information </li></ul><ul><li>Major industry in Boston </li></ul>
  12. 12. Pension Funds <ul><li>Manage/invest employee savings/pension plans </li></ul><ul><li>Similar in spirit to mutual funds </li></ul><ul><li>Hired by employer </li></ul>
  13. 13. Retirement Systems <ul><li>Defined benefit </li></ul><ul><ul><li>Contributions to employer </li></ul></ul><ul><ul><li>Receive formula at retirement </li></ul></ul><ul><ul><li>Do not control assets </li></ul></ul><ul><li>Defined contribution </li></ul><ul><ul><li>Contributions made to employees own account </li></ul></ul><ul><ul><li>Receive lump sum at retirement </li></ul></ul><ul><ul><li>Employee controls assets </li></ul></ul><ul><ul><li>Transferable/increasing </li></ul></ul>
  14. 14. Hedge Funds <ul><li>Large investors </li></ul><ul><li>Less regulation </li></ul><ul><li>Broader strategies </li></ul><ul><ul><li>Derivatives </li></ul></ul><ul><ul><li>Short sales </li></ul></ul><ul><ul><li>More risk?? </li></ul></ul><ul><li>Growing fast </li></ul>
  15. 15. Money Market Funds <ul><li>Purchase only low risk securities </li></ul><ul><ul><li>Government bonds </li></ul></ul><ul><ul><ul><li>Treasury bills, Treasury bonds </li></ul></ul></ul><ul><ul><ul><li>Tax anticipation notes </li></ul></ul></ul><ul><ul><li>Short term corporate debt </li></ul></ul><ul><ul><ul><li>Commercial paper </li></ul></ul></ul><ul><ul><li>International low risk securities </li></ul></ul>
  16. 16. Insurance Companies <ul><li>Insure individual and corporate risks </li></ul><ul><li>Receive payments (insurance premia) </li></ul><ul><li>Payout for losses </li></ul><ul><li>New issues </li></ul><ul><ul><li>Trading insurance policies </li></ul></ul><ul><ul><li>Derivatives </li></ul></ul><ul><ul><li>High tech risk management </li></ul></ul>
  17. 17. Others <ul><li>Information and software services </li></ul><ul><ul><li>Bloomberg </li></ul></ul><ul><ul><li>Quicken </li></ul></ul><ul><ul><li>Microsoft </li></ul></ul><ul><ul><li>Yahoo </li></ul></ul><ul><ul><li>Google </li></ul></ul>

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