Chapter-26-notes - Finance 3700 Financial Markets and...

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Finance 3700 Financial Markets and Institutions Fall 2007 Lecture Notes CHAPTER 26: Finance Companies © Sven Thommesen
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2 Banks vs. non-bank banks Definition of a bank: it is a financial institution that both accepts deposits from the public; and makes loans to the public. We have discussed several such depository institutions already: commercial banks, savings and loans, savings banks, and credit unions. As we mentioned, due to the fractional-reserve nature of our banking system, and the devastating effects on the economy if we were to have a crisis in the banking system, institutions classified as “banks” are more heavily regulated than other financial institutions. There are some financial institutions which conduct one, but not both, of the functions listed above. These are referred to as “non-bank banks.” For example, we have: Finance companies, which make loans but do not accept deposits; and Mutual funds, which accept deposits but do not make loans. Mutual funds were covered in chapter 21. FINANCE COMPANIES Finance companies operate by borrowing large sums of money in financial markets and then lending it out in smaller chunks to members of the public. Thus, their chief uses of funds are: loans to businesses and households. Chief sources of funds are: their own equity, the money market (sales of commercial paper), the capital markets (sales of bonds), and bank loans. Their “asset transformation” functions include: Maturity : typically, finance companies “borrow long and lend short”: their loans are usually of shorter maturity than their liabilities. This is the opposite of what is the case for depository institutions, which generally “borrow short and lend long.” Denomination : as we said, finance companies typically “borrow large and lend small”: they sub-divide capital. This is the opposite of what depository institutions do.
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This note was uploaded on 04/20/2008 for the course FINC 3700 taught by Professor Thommesen during the Spring '08 term at Auburn University.

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Chapter-26-notes - Finance 3700 Financial Markets and...

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