Unit - 1Overview of FinancialMarkets and Institutions Sitaram Dhakal
Overview• An overview of Financial Institutions• Types of Financial Institutions• Regulation of Financial Institutions
An overview of Financial Institutions• Group of firms that perform the functions of channeling funds from suppliers of the firms to the users of the funds.• Channel the saving of individuals, businesses and government units into loans and investment.• Examples : Commercial Banks, Thrifts, Insurance Companies, Securities firms and investment banks, Finance companies, Mutual Funds, Pension Funds etc.
Commercial Banks• A Depository Institution• Raise funds primarily by issuing checkable deposits, saving deposits, and time deposits.• Assets are loans and liabilities are deposits• Loans cover the broad range consumer, commercial and real state loans.• Non deposit liabilities are subordinated debentures and notes.• The major buyer of government securities and municipal bonds.• Creditors have no formal control over its management.
Thrifts• Accept deposits and provide lending services to the users as important financial service.• Concentrate on one segment loan either real estate loans or consumer loans• Organized as mutual associations because very depositor becomes member of such an institutions and members are the owners as well.• Entire management is formally subject to control of owners.• Perform the jobs like commercial banks, also known as near banks institutions.• Savings institutions and credit unions are jointly recognized as thrift institutions.
Insurance Companies• Protects individuals and corporations from adverse events against premiums.• Life insurance protects from untimely death, illness and retirement of individuals.• Property casualty insurance protects against personal injury and liability due to accident, death, fire and so on.
Mutual Funds• Acquire funds by selling shares to many individuals and use the proceeds to purchase diversified portfolios of stocks and bonds.• Mutual funds allow shareholders to pool their resources so that they can take advantage of lower transaction costs when buying large blocks of stocks or bonds.• Allow shareholders to hold more diversified portfolios than they otherwise would.• Shareholders can sell (redeem) shares at any time, but the value of these shares will be determined by the value of the mutual fund’s holdings of securities.
Finance companies • Raise funds by selling commercial paper (a short- term debt instrument) and by issuing stocks and bonds. • Lend these funds to consumers (who make purchases of such items as furniture, automobiles, and home improvements) and to small businesses. • Some finance companies are organized by a parent corporation to help sell its product. • For example, Ford Motor Credit Company makes loans to consumers who purchase Ford automobiles.
Credit Union • Typically very small cooperative lending institutions organized around a particular group: union members, employees of a particular firm, and so forth. • They acquire funds from deposits called shares and primarily make consumer loans.
Contractual Institutions • Insurance companies and pension funds • Financial intermediaries that acquire funds at periodic intervals on a contractual basis. • They can predict with reasonable accuracy how much they will have to pay out in benefits in the coming years. • No worry as much as depository institutions about losing funds quickly. • The liquidity of assets is not as important a consideration for them as it is for depository institutions • Invest their funds primarily in long-term securities such as corporate bonds, stocks, and mortgages.
Regulation of Financial Institutions • Government setting, rules and regulations for FIs to protect public interest. • Protect the failure of financial system to save the ultimate loss of both users and suppliers of the fund. • Failure of commercial banks may destroy the household savings. • Failure of insurance companies may unable to cover the risk of individuals and businesses • Government creates different departments Central Bank, Insurance committee, SEBON, Cooperative development board, Tourism board etc.