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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 l.jpg

Chapter 13Financial Intermediaries

©2000 South-Western College Publishing


Financial innovation l.jpg
FinancialInnovation

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


Financial intermediaries l.jpg
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


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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


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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


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Default Risk

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


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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


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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


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Exchange RateRisk

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


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Balance Sheet

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


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Thrifts

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


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CommercialBanks

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


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TransactionsDeposits

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


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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


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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)%


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SavingsDeposits

  • Highly liquid deposits that can usually be withdrawn on demand but not by writing a check


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Time Deposits

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


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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


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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


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Savings Banks

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


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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


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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.


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Credit Unions

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


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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


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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) %


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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


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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


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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)%


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Pension Funds

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


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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 %


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Casualty Companies

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


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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 %


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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


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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


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Money MarketMutual Funds

  • Mutual funds that invest in money market instruments


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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 %


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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


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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)


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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