business.kent.edu

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business.kent.edu

  1. 1. Economic Role of Financial Institutions <ul><li>Maturity intermediation </li></ul><ul><li>Risk reduction via diversification </li></ul><ul><li>Reduction in the costs of contracting and information </li></ul><ul><li>Mechanism for providing payments </li></ul>
  2. 2. Financial Institution Functions <ul><li>Transform fin. assets into different and more broadly preferable fin. assets </li></ul><ul><li>Exchange fin. assets on behalf of customers </li></ul><ul><li>Exchange fin. assets for their own account </li></ul><ul><li>Assist in creation and sale of fin. assets </li></ul><ul><li>Provide investment advice </li></ul><ul><li>Mange portfolios of fin. assets </li></ul>
  3. 3. Depository Institutions <ul><li>Financial Institutions that: </li></ul><ul><ul><li>Accept deposits (Insured by government) </li></ul></ul><ul><ul><li>Have access to payment system </li></ul></ul><ul><ul><li>Are heavily regulated </li></ul></ul>
  4. 4. Types of Depository Institutions <ul><li>Commercial Banks </li></ul><ul><li>Thrifts: </li></ul><ul><ul><li>Savings and Loan Associations (S&Ls) </li></ul></ul><ul><ul><li>Savings Banks </li></ul></ul><ul><ul><li>Credit Unions </li></ul></ul>
  5. 5. Deposit Insurance <ul><li>Commercial Banks - FDIC (BIF) </li></ul><ul><li>S&Ls - FDIC (SAIF) </li></ul><ul><ul><li>Before 1989 - FSLIC </li></ul></ul><ul><li>Savings Banks - FDIC (BIF or SAIF) </li></ul><ul><li>Credit Unions - NCUSIF </li></ul><ul><li>Before 1985 there were a few state insurance funds </li></ul>
  6. 6. Payment System <ul><li>Check clearing system </li></ul><ul><li>Wire transfer system </li></ul><ul><li>Closely related: </li></ul><ul><ul><li>Credit card system </li></ul></ul>
  7. 7. Bank Reserves <ul><li>Must maintain non-interest bearing reserves against checking account balances </li></ul><ul><ul><li>$0-$6 million – 0% </li></ul></ul><ul><ul><li>$6-$42.1 million - 3% </li></ul></ul><ul><ul><li>Over $42.1 million - 10% </li></ul></ul><ul><li>Can borrow and lend reserves in the Federal funds market </li></ul><ul><li>In an emergency can borrow from the “discount window” </li></ul>
  8. 8. Regulatory Structure - Banks <ul><li>State </li></ul><ul><li>Federal </li></ul><ul><ul><li>Federal Reserve </li></ul></ul><ul><ul><li>Office of the Comptroller of the Currency (OCC) </li></ul></ul><ul><ul><li>Federal Deposit Insurance Corp. (FDIC) </li></ul></ul>
  9. 9. Regulatory Structure - Thrifts <ul><li>S&Ls and Savings Banks </li></ul><ul><ul><li>State </li></ul></ul><ul><ul><li>Federal </li></ul></ul><ul><ul><ul><li>Office of Thrift Supervision (OTS) </li></ul></ul></ul><ul><ul><ul><li>FDIC </li></ul></ul></ul><ul><li>Credit Unions </li></ul><ul><ul><li>State </li></ul></ul><ul><ul><li>National Credit Union Association (NCUA and NCUSIF) </li></ul></ul>
  10. 10. Depository Institution Sources of Income <ul><li>Interest rate spread </li></ul><ul><li>Fee income </li></ul>
  11. 11. Depository Institution Risks <ul><li>Credit risk </li></ul><ul><li>Regulatory risk </li></ul><ul><li>Interest rate risk (funding risk) </li></ul><ul><li>Liquidity risk </li></ul>
  12. 12. Nondepository Institutions <ul><li>Insurance Companies </li></ul><ul><ul><li>Life </li></ul></ul><ul><ul><li>Property and Casualty </li></ul></ul><ul><li>Investment Companies (Mutual Funds) </li></ul><ul><li>Investment Banking Firms </li></ul>
  13. 13. Other Nondepository Institutions <ul><li>Finance Companies </li></ul><ul><ul><li>Commercial </li></ul></ul><ul><ul><li>Consumer </li></ul></ul><ul><li>Pawn Shops </li></ul><ul><li>Check Cashing Stores </li></ul><ul><li>Pension Plans </li></ul><ul><ul><li>Defined Benefit </li></ul></ul><ul><ul><li>Defined Contribution </li></ul></ul>
  14. 14. Selected Financial Institution Issues <ul><li>“ Safety Net” for Depository Institutions </li></ul><ul><ul><li>Moral Hazard </li></ul></ul><ul><ul><li>Thrift Crisis </li></ul></ul><ul><ul><li>“ Too Big to Fail” Doctrine </li></ul></ul><ul><li>“ Gramm-Leach-Bliley” or The Financial Services Modernization Act of 1999 </li></ul><ul><ul><li>Banking and Security Underwriting </li></ul></ul><ul><ul><li>Banking and Insurance </li></ul></ul>
  15. 15. Selected Financial Institution Issues <ul><li>Separation of Banking and Commerce </li></ul><ul><li>Consolidation Trend in Depository Institutions </li></ul><ul><li>Trend toward off-balance sheet activities by depository institutions </li></ul><ul><li>“ Social” regulations (e.g. CRA) </li></ul>
  16. 16. Selected Financial Institution Issues <ul><li>Market Share Shifts Away from Banks </li></ul><ul><ul><li>Mutual Funds </li></ul></ul><ul><ul><li>Commercial Paper </li></ul></ul><ul><ul><li>Credit Unions </li></ul></ul><ul><li>Risk Based Capital and Deposit Insurance </li></ul>
  17. 17. Selected Financial Institution Issues <ul><li>Insurance Company Issues </li></ul><ul><ul><li>State versus federal regulation </li></ul></ul><ul><li>Trend toward defined contribution pension plans </li></ul><ul><li>Relative importance of institutions vs markets in the economy </li></ul>
  18. 18. Selected Financial Institution Issues <ul><li>Conflicts of Interest in Investment Banking </li></ul><ul><ul><li>Questionable deals with Enron et al </li></ul></ul><ul><ul><li>IPO allocations </li></ul></ul><ul><ul><li>Analysts </li></ul></ul><ul><li>Conflicts of Interest in Mutual Funds </li></ul><ul><ul><li>Late trading and market timing </li></ul></ul><ul><ul><li>Excess sales charges </li></ul></ul>

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