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Chapter 2: Financial Institutions. What Do Financial Mkts. & Institutions Do?. Financial Intermediation Benefits of Intermediation Denominational Divisibility Maturity Flexibility Credit Risk Diversification Liquidity Kinds of Financial Institutions

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Chapter 2: Financial Institutions

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Chapter 2: Financial Institutions

  • What Do Financial Mkts. & Institutions Do?


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  • Financial Intermediation

  • Benefits of Intermediation

    • Denominational Divisibility

    • Maturity Flexibility

    • Credit Risk Diversification

    • Liquidity

  • Kinds of Financial Institutions

    • Deposit Type Institutions: Issue Insured Deposits & Make Loans

      • Commercial Banks (8,500)

      • Savings & Loans or Savings Banks (Thrifts) – 1,600

      • Credit Unions – 12,000


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  • Contractual Savings Institutions

    • Life Insurance Cos.

    • Casualty Insurance Cos.

    • Pension Funds

  • Other Types of Financial Institutions

    • Finance Cos.

    • Mutual Funds

      • Net Asset Value (NAV)

      • Open-ended

      • Close-ended (exchange traded)

      • Exchange Traded Funds (ETFs)

        • Spiders, Diamonds, Vipers, Oh My!




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  • Risks Faced by Financial Institutions

    • Credit Risk

    • Interest Rate Risk

    • Liquidity Risk

    • Foreign Exchange Risk

    • Political Risk

  • Financial Institutions Make Money on the Spread & by Charging Fees for Service.



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  • Data on Financial Institutions

    • http://www.federalreserve.gov/

    • http://www.fdic.gov/

    • http://www.cuna.org/

    • http://www.morningstar.com/

    • http://www.vanguard.com/

  • Homework: Find a the balance sheet & income statement for a financial institution.


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Key Ratios

  • NIM = (Int. Inc. – Int. Exp)/Totl. Assets

  • ROA = Net Inc./ Totl. Assets

  • ROE = Net Inc./ Equity

  • ROE = NI/Rev. * Rev./TA * TA/EQ

  • Rev. = Int. Inc. + Other Inc.


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