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Chapter 13 Financial Intermediaries ©2000 South-Western College Publishing Financial Innovation The creation of new financial instruments, markets, and institutions in the financial services industry Financial Intermediaries

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Chapter 13 Financial Intermediaries

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Chapter 13Financial Intermediaries

©2000 South-Western College Publishing


FinancialInnovation

  • The creation of new financial instruments, markets, and institutions in the financial services industry


Financial Intermediaries

  • Reduce the risks and costs of borrowing, lending, and other financial transactions

  • Fulfill the demand for various financial assets and services, including protection against financial losses


FIs as Firms

INPUTS

•Sources of Funds•Liabilities

FIs

OUTPUTS

•Uses of Funds•Assets

Bank

Deposits

Loans

& Liabilities

Premium Payments

(Benefits DuePolicyholders)

Insurance

Company

Loans

& Securities


ContingentClaims

  • Claims such as casualty and life insurance benefits that offer protection from the often catastrophic financial effects of theft, accidents, natural disasters, and death


Default Risk

  • The risk that a DSU is unwilling or unable to live up to the terms of the liability it has sold


Interest RateRisk

  • The risk that the interest rate will unexpectedly change so that the costs of an FI’s liabilities exceed the earnings on its assets


Liquidity Risk

  • The risk that the FI will be required to make a payment when the intermediary has only long-term assets that cannot be converted to liquid funds quickly without a capital loss


Exchange RateRisk

  • The risk that changes in the exchange rate can adversely affect the value of foreign exchange or foreign financial assets


Balance Sheet

  • An accounting statement that presents the monetary value of an economic unit’s assets, liabilities, and net worth on a specific date


Thrifts

  • Depository institutions known as S&Ls, savings banks, and credit unions


CommercialBanks

  • Depository institutions that issue checkable, time, and savings deposit liabilities and, among other things, make loans to commercial businesses


TransactionsDeposits

  • Deposits that can be exchanged for currency and are used to make payments through writing a check or making an electronic transfer


Financial Assets Commercial Banks (billions) 12/31/98

$5,635.5

66.5

42.1

24.4

3,306.1

1,315.5

1,337.7

508.9

142.9

876.6

214.1

662.6

104.8

181.0

1,101.4

100.0

1.2

.07

.04

58.7

23.3

23.7

9.0

2.5

15.6

3.8

11.8

1.9

3.2

19.5

  • Total % of Assets

  • Financial Assets%

  • Reserves

  • Vault Cash

  • Deposits at Fed

  • Loans

  • Business Loans

  • Mortgages

  • Consumer Credit

  • Security Credit

  • U.S. Gov Securities

  • Treasury Securities

  • Gov Agency Securities

  • Municipal Securities

  • Corporate & Foreign Bonds

  • Miscellaneous


Financial Liabilities Commercial Banks (billions) 12/31/98

$5,514.2

624.1

1,946.2

672.8

639.2

57.0

220.2

105.0

1,134.1

115.6

1.8

–2.7

140.8

$ 121.3

97.8

11.0

34.5

11.9

11.3

1.0

3.9

1.9

20.1

2.1

<.01

< –.01

2.5

2.7

  • Total % of Assets

  • Liabilities%

  • Checkable Deposits

  • Small Time Deposits

  • Large Time Deposits

  • Fed Funds

  • Commercial Paper

  • Corporate Bonds

  • Loans & Advances

  • Miscellaneous

  • Net Interbank Liabilities

  • To the Fed

  • To Domestic Banks

  • To Foreign Banks

  • Net Worth (Capital)%


SavingsDeposits

  • Highly liquid deposits that can usually be withdrawn on demand but not by writing a check


Time Deposits

  • Deposits that have a scheduled maturity and a penalty for early withdrawal


Savings andLoan Associations (S&Ls)

  • Depository institutions established for the purpose of pooling the savings of local residents to finance the construction and purchase of homes


Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989

  • An act that attempted to resolve the S&L crises by creating a new regulatory structure, limiting the assets S&Ls could acquire, and requiring S&Ls to maintain adequate capital


Savings Banks

  • Depository institutions located mainly on the East Coast set up to help finance the construction and purchase of homes


Financial Assets Savings Assoc. (billions) 12/31/98

$1,088.1

1.9

18.4

1.5

14.7

153.7

2.5

88.6

643.8

51.6

24.5

24.2

62.8

100.0

.02

1.7

.13

1.3

14.1

.23

8.1

59.2

4.7

2.3

2.2

5.8

  • Total % of Assets

  • Financial Assets

  • Reserves at Fed

  • Checkable Dep & Currency

  • Time & Savings Deposits

  • Fed Funds & Repurchase

  • U.S. Gov Securities

  • Municipal Securities

  • Corp & Foreign Bonds

  • Mortgages

  • Consumer Credit

  • Corporate Equities

  • Loans & Advances

  • Miscellaneous


Financial Liabilities Savings Assoc. (billions) 12/31/98

$1,058.2

693.0

185.6

393.6

113.8

51.3

2.6

210.7

100.6

$ 29.9

97.3

63.7

17.1

36.2

10.1

4.7

.24

19.4

9.2

2.7

  • Total % of Assets

  • Liabilities%

  • Deposits

  • Checkable

  • Small Time Deposits

  • Large Time Deposits

  • Repurchase Agreements

  • Corporate Bonds

  • Loans & Advances

  • Miscellaneous

  • Net Worth (Capital)%

Exhibit 13 - 3 cont.


Credit Unions

  • Depository institutions that are cooperative, nonprofit, tax-exempt associations operated for the benefit of members who share a common bond


Financial Assets Credit Unions. (billions) 12/31/98

$394.5

8.8

25.2

6.8

72.6

97.0

157.2

26.9

100.0

2.2

6.4

1.7

18.4

24.6

39.8

6.8

  • Total % of Assets

  • Financial Assets%

  • Checkable Dep & Currency

  • Time & Savings Deposits

  • Fed Funds & Repurchase

  • U.S. Gov Securities

  • Mortgages

  • Consumer Credit

  • Miscellaneous


Financial Liabilities Credit Unions (billions) 12/31/98

$358.0

350.7

43.0

289.2

18.5

7.3

$ 36.5

90.7

88.9

10.9

73.3

4.7

1.9

9.3

  • Total % of Assets

  • Total Liabilities %

  • Shares / Deposits

  • Checkable

  • Small Time Deposits

  • Large Time Deposits

  • Miscellaneous

  • Net Worth (Capital) %


Life Insurance Companies

  • Intermediaries that offer the public protection against the financial costs associated with events such as death and disability in exchange for premiums


Financial Assets Life Insurance Co.s (billions) 12/31/98

$2,819.5

117.8

1,086.2

746.1

333.0

211.9

104.4

31.3

73.7

115.2

100.0

4.2

38.5

26.4

11.8

7.5

3.7

1.1

2.6

4.0

  • Total % of Assets

  • Financial Assets%

  • Checkable Deposits, Currency and Money Market Shares

  • Corporate & Foreign Bonds

  • Corporate Equities

  • U.S. Gov’t. Securities

  • Mortgages

  • Policy Loans

  • Mutual Fund Shares

  • Open Market Paper

  • Miscellaneous


Financial Liabilities Life Insurance Cos.(billions) 12/31/98

$2,641.2

673.5

1,401.1

566.6

$178.3

93.7

23.9

49.7

20.0

6.3

  • Total % of Assets

  • Liabilities %

  • Life Insurance Reserves

  • Pension Fund Reserves

  • Miscellaneous

  • Net Worth (Capital)%


Pension Funds

  • Tax-exempt intermediaries set up to provide participants with income at retirement in exchange for premiums


Assets & Liabilities of Pension Funds (billions) 12/31/98

$6,675.3

9.5

31.6

89.9

58.4

564.1

3,825.1

898.8

2.2

545.8

45.8

93.6

510.5

$6,726.1

$6,726.1

100.0

.01

.04

1.3

.09

8.5

57.3

13.5

.003

8.2

.07

1.4

7.6

101.0

101.0

  • Total % of Assets

  • Financial Assets %

  • Checkable Deposits & Currency

  • Time & Savings Deposits

  • Repurchase Agreements

  • Money Market Mutual Funds

  • Mutual Funds

  • Corporate Equities

  • U.S. Gov Securities

  • Municipals

  • Corporate & Foreign Bonds

  • Mortgages

  • Commercial Paper

  • Miscellaneous

  • Liabilities%

  • Pension Fund Reserves %


Casualty Companies

  • Intermediaries that provide protection against the effects of unexpected occurrences on property in exchange for premiums


Assets & Liabilities

Casualty Companies (billions)12/31/98

$884.0

42.1

204.0

195.8

163.4

158.4

60.6

59.5

$550.4

$333.6

100.0

4.8

23.0

22.1

18.5

17.9

6.9

7.9

62.3

37.7

  • Total % of Assets

  • Financial Assets %

  • Checkable Deposits, Currency, and Repurchase Agreements

  • Corporate Equities

  • Municipal Securities

  • U.S. Gov Securities

  • Corporate & Foreign Bonds

  • Trade Receivables

  • Miscellaneous

  • Liabilities %

  • Net Worth %


Mutual Funds

  • Investment-type intermediaries that pool the funds of SSUs, purchase the financial claims of DSUs, and return the income received minus a management fee to the SSUs


Assets & Liabilities Mutual Funds (billions) 12/31/98

(Open-end and Closed-end)

$3,626.1

65.8

2,523.4

375.1

243.4

338.9

65.8

13.7

$3,626.1

$3,626.1

100.0

1.8

69.6

10.3

6.7

9.3

1.8

.04

100.0

100.0

  • Total % of Assets

  • Financial Assets %

  • Repurchase Agreements

  • Corporate Equities

  • U.S. Gov Securities

  • Municipal Bonds

  • Corporate & Foreign Bonds

  • Commercial Paper

  • Miscellaneous

  • Liabilities %

  • Mutual Fund Shares %

Exhibit 13 - 8


Money MarketMutual Funds

  • Mutual funds that invest in money market instruments


Assets & Liabilities Money Market (billions) 12/31/98

$1,334.2

–1.0

127.0

139.5

30.6

277.5

193.0

414.2

81.2

72.2

$1,334.2

$1,334.2

100.0

<–.01

9.5

10.5

2.3

20.8

14.5

31.0

6.1

5.4

100.0

100.0

  • Total % of Assets

  • Financial Assets%

  • Checkable Deposits & Currency

  • Small Time & Savings Deposits

  • Repurchase Agreements

  • Foreign Deposits

  • U.S. Gov. Securities

  • Municipals

  • Commercial Paper

  • Corporate & Foreign Bonds

  • Miscellaneous

  • Liabilities%

  • Money Market Fund Shares%


Finance Companies

  • Intermediaries that lend funds to households to finance consumer purchases and to firms to finance inventories, receive funds to lend by selling commercial paper, issuing long-term bonds, and obtaining bank loans


Assets & Liabilities Finance Companies (billions) 12/31/98

$826.6

22.8

106.2

168.5

355.5

173.6

$848.6

358.4

25.0

232.3

233.1

– $ 22.0

100.0

2.8

12.8

20.4

43.0

21.0

102.7

43.4

3.0

28.0

28.2

–2.7

  • Total % of Assets

  • Financial Assets

  • Checkable Deposits &Currency

  • Mortgages

  • Consumer Credit

  • Other Loans

  • Miscellaneous

  • Liabilities

  • Corporate Bonds

  • Bank Loans

  • Commercial Paper

  • Miscellaneous

  • Net Worth (Capital)


Total Financial Assets of Principal FIs (billions)

$505

252

18

201

50

170

47

64

$1,951

1,180

116

697

251

1,211

368

306

$3,414.4

1,144.9

240.0

1.499.5

575.8

1,892.1

840.7

535.0

559.7

$5,635.5

1,088.1

394.5

2,819.5

884.0

6.675.3

3,626.1

1,334.2

826.6

  • 1970 1984 1991 1998

  • Deposit Type

  • Commercial Banks

  • Saving Associations

  • Credit Unions

  • Contractual Type

  • Life Insurance Cos.

  • Casualty Cos.

  • Pension Funds

  • Investment Type

  • Mutual Funds

  • Money Market MF

  • Finance Co. Type


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