im12 - Part 4 Financial Institutions Chapter 12 What...

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Chapter 12 What Financial Institutions Do Overview This chapter provides an overview of U.S. financial institutions. It can be assigned as background for courses that emphasize policy issues or it can be gone through carefully in courses with a more institutional focus. In either case, the chapter is a resource that students can refer back to later. It provides more than a catalog of different financial institutions; it uses the risk-sharing, liquidity, and information framework developed in earlier chapters to describe the services provided by each institution. How each financial institution operates in matching savers and borrowers and the means by which it provides the services of risk sharing, liquidity, and information are presented. Table 12.2 in the text provides a convenient summary of the points made. Securities markets institutions help financial markets function smoothly. Investment banks lower information costs: for borrowers by investigating market conditions for new securities issues, and for savers by putting the investment bank’s reputation behind the firms whose new issues it underwrites. Securities markets institutions, such as brokers and dealers, exchanges, and over-the-counter markets, increase liquidity by providing a secondary market for securities. Investment institutions, such as mutual funds and finance companies, provide liquidity and risk sharing by converting small individual claims into diversified portfolios of securities or loans. Contractual saving institutions, such as insurance companies and pension funds, provide risk sharing, either by providing risk pooling against unforeseen events or by providing claims on a diversified portfolio of assets for retirement saving. The discussion of the insurance industry is particularly thorough and spells out succinctly the workings of a financial intermediary whose importance is sometimes underestimated. The discussion of depository institutions is fairly brief and is intended to place the risk-sharing, liquidity, and information services provided by these institutions in a broader context. The detailed discussion of depository institutions appears in Chapters 13–16. Finally, there is a discussion of the role of the U.S. government in financial intermediation both directly—through government-sponsored financial institutions such as Fannie Mae and Ginnie Mae—and indirectly—through guarantees of loans made by private financial institutions, such as the guarantee of certain private mortgage loans by the Federal Housing Administration. Outline I. Securities Market Institutions A) Securities market institutions reduce the costs of matching savers and borrowers and provide risk-sharing, liquidity, and information services. B)
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im12 - Part 4 Financial Institutions Chapter 12 What...

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