MBB15

2. Money, Banking,
and Business
Lecture 15
Financial Intermediaries
Chapter 8

3. Questions?

4. Financial Innovation
New ways to create
financial capital

5. Financial
Intermediaries
FIs
trading obligations
for-profit
not-for-profit

6. Financial Instruments
Agreements
Time and Money

7. Insurance
Contingent Claims
Financial effects

8. FI Risks
Credit Risk
Interest Rate Risk
Liquidity Risk
Exchange Rate

9. FI Risks
Assume losses
Profits will cover

10. Credit Risk
default
asymmetric information
adverse selection
moral hazard

11. Interest Rate Risks
Borrow Short
Loan Long
Rate Changes
Upside down

12. Interest
Rate
Time
Interest Rate Risk
1 10
3%
6%
7%
Calls
Adjustable Rate

13. Liquidity Risk
unexpected withdraws
disasters

14. Interest
Rate
Liquidity
Liquidity Risk
LowHighly

15. Exchange Rate
Currency Exchange Rates
2,443 to 1
Mongolian Tughrik
MNT
₮
U.S. Dollar
USD
$

17. Source : xe.com

18. Dispositories
Credit Unions
Savings & Loan
Commercial Banks

19. Dispositories
Transaction Deposits
Savings Deposits
Time Deposits

20. Contractural
liabilities defined by a
contract
contingent
regular payments
premiums

21. Contractural
Life Insurance
Pension Fund
Property and Casualty

22. Contractural
Predictable
Long term
Higher returns

23. Pension Funds
Largest class of stock
market investors

24. Property and Casualty

25. Property and
Casualty Insurance
Less Predictable
More liquidity

26. Property and
Casualty Insurance
Less Predictable
More liquidity

27. Investment
Mutual Funds
Money Market Funds

28. Finance Companies
Risky Loans
Raise money by issuing
commercial paper and bonds

29. FINANCIAL
INTERMEDIARY
SOURCE USE
Commercial Banks Deposits Loans, Mortgages, Securities
Savings and Loans
Mutual Savings Banks
Deposits Mortgages
Credit Unions Deposits
Consumer Loans
Mortgages
Life Insurance Premiums Corporate Bonds
Pension Funds Employee & Employer Stocks, Bonds, Mortgages
Property & Casulty Premiums
Municipals, Bonds,
Government
Mutual Funds Shares Stocks and Bonds
Money Market Fund Shares Money Market Instruments
Finance Companies Bonds and Commercial Paper
Consumer, Business,
Mortgages

30. Financial Intermediary 2017 %
Banks $15,208 23.5%
Credit Unions $1,320 2.0%
Life Insurance $7,141 11.0%
P & C Insurance $2,018 3.1%
Pension Funds $19,549 30.2%
Mutual Funds $15,346 23.7%
Money Market $2,747 4.2%
Finance Companies $1,487 2.3%
Summary $64,816 100.0%
Source: FED Z.1 Report 3Q 2017