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Lecture Notes - Intro to Financial Institutions & their Regulators

Lecture Notes - Intro to Financial Institutions & their Regulators

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Unformatted text preview: Intro to Intro to Money, Financial Instruments, Financial Institutions And Their Regulators Some Terms and Concepts Some Terms and Concepts You Should Know Money Currency Financial Instruments Financial Institution and Financial Intermediary Balance Sheet Debt versus Equity Payment, Credit, Investment and Transfer of Risk Instruments Insolvency, Liquidity and Value Risks Capital Assets Liabilities Business form and /organizational structure Charter Mutual company Stock company Types of Financial Institutions Banks, Thrifts and Credit Unions Insurance Companies Securities Companies GSEs Intermediation (and disintermediation) Concept of Money Concept of Money Money a medium of exchange and a standard of value (compare to financial institution (intermediary) that collects and distributes money) convenience, consistency, transferability, reliability and trusted value Kinds of Money: gold (specie or commodity) vs paper money, notes or credit (based on accepted financial commodity or backer) Currency governmentally recognized money Bank notes may be money, or currency if issued by the Federal Reserve Money Money Risks associated with money (and other financial instruments) Insolvency risk Liquidity risk Value risk – inflation, delay in payment Fraud risk Compatibility: Multiple currencies – multiple “issuers” (distinguish between currency and money) Concept of note and credit in lieu of money A “discounted” note is transferred at less than face value Financial Instruments Financial Instruments Any written instrument having monetary value or evidencing a monetary transaction Instruments that represent currency or cash Currency Government notes Deposits Instruments that are “derivative” of something else of value Stocks Mutual Funds Futures Contracts What are Financial Institutions? What are Financial Institutions? Concept of Financial Intermediary Different ways of Classifying Charter Types (authorized powers): Banks, Savings Banks and “thrift” institutions, credit unions, lending companies, insurance companies, securities brokerage firms and underwriting companies, mutual funds, private equity firms, GSEs…. and many more Functional Types (purpose): Liquidity/Payment; Credit Products; Investment; Risk Transfer What is financial intermediation? What is financial intermediation? Intermediation is the process of transferring funds from an ultimate source to an ultimate user. For example, a bank, intermediates credit when it obtains money from a depositor and re­lends it to a borrowing customer. The opposite is Disintermediation, the withdrawal of funds when savers (or other source of funds) expect to earn a higher yield through a different channel ­ like investment in stocks or bonds or mutual funds. What is a Financial What is a Financial Intermediary? A financial intermediary is an entity that performs intermediation between two or more parties in a financial context; i.e. an institution that facilitates the channeling of funds between persons who have money and persons who need money. Examples of a Financial Examples of a Financial Intermediaries Banks, Savings banks, credit unions: Individuals deposit (lend) funds to an intermediary institution (bank, etc) and the institution then lends those funds to spenders (borrowers) Investment (securities) Funds: Individuals invest money in funds, and the funds then invest in businesses Insurance: Individuals pool their funds (mutual) or purchase contracts to protect against risk; insurance companies are the intermediary between those who want to avoid risk and those who will assume risk for a fee GSEs: Freddie Mac, Fannie Mae, Federal Home Loan Banks Organizational structure: may be a stock company or mutual company; financial services holding companies Different Business Forms of Different Business Forms of Financial Intermediary Banks (State and National) Savings Institutions (State and Federal) Credit Unions (State and Federal) _________________ Finance, Mortgage and other Loan Companies REITS Pension Funds Investment Companies Money Market Funds Mutual Funds Insurance Companies (property and casualty, life and others) Securitizations and trusts Non­asset intermediaries (brokers, dealers and exchanges) Different Ways of Categorizing Different Ways of Categorizing Financial Institutions By Industry Banking (depository financial institutions) Securities (includes most investment types of Financial Institutions, including Investment Banks) Insurance Other: Includes non­bank lenders (mortgage bankers, consumer loan companies), check cashers, and federal financial intermediaries like GSEs (Fannie, Freddie), the Federal Reserve Banks and Home Loan Banks * Industries are merging and lines less distinct Mix of Financial Institutions Mix of Financial Institutions by Size of Balance Sheets By Type of Products or Services Offered (Functional) Different Ways of Categorizing Different Ways of Categorizing Financial Institutions Payment and Liquidity products (debit cards, personal checking accounts, EFTs (electronic transfer services) Credit products (loans) Investment products (securities) Transfer of Risk products (insurance, futures, “hedging” products, etc) * Many Financial Institutions offer multiple products Different Ways of Categorizing Different Ways of Categorizing Financial Institutions 1. By Charter (specific regulator) National Banks – OCC Federal Savings Associations and FSBs – OTS Credit Unions – NCUA State chartered banks and thrifts – State Banking Commissioner Insurance Companies – State Insurance Commissioner Mutual vs Stock Institutions Mutual vs Stock Institutions Mutual organization – a company where the customers are the owners or “members” who share in the profits and expenses of the company, such as an insurance company in which the policyholders constitute the members of the insuring company. Banks where depositors are owners of the bank are mutual in nature; credit unions are a special type of mutual ownership company. Mutual vs Stock form of Company Mutual vs Stock form of Company Stock Company ­ A company or corporation whose capital is divided into shares. The owners of the company are called stockholders or shareholders and are typically represented by a board of directors who are responsible for overseeing the operation of the company. Generally, the directors will hire a company president to manage the day to day activities of the company. Regulators: Why? Regulators: Why? Mission – Public Policy Maintaining financial stability (consistency and protection of financial markets) Ensuring safety and soundness of financial institutions (solvency) Maintaining an efficient and competitive financial system (system risk) Protection of consumers and other groups Entity Regulation vs Product Regulation Regulators: Who? Regulators: Who? Agencies in the Executive Branch of Govt. Different Ways to Classify Regulators Industry (who they charter): Banking, Securities, Insurance State or Federal: Federal: OCC, OTS, FDIC, FRB, NCUA, SEC (no federal insurance regulator) State: banking, insurance and securities regulators Multiple – based on functions or instruments being regulated Functional (what sorts of transactions or services) Regulators – What they do Regulators – What they do Regulatory Powers Implement Laws Rulemaking authority (Promulgating Regulations) Chartering Institutions and other Approvals Supervision and Examination Enforcement Supervisory Powers ...
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