Chapter 4 Financial Intermediaries and the Banking System

1. Chapter 4Financial Intermediaries and the Banking System Chapter 4

2. Financial Intermediaries • Specialized financial firms that facilitate the indirect transfer of funds from savers to borrowers by offering savings instruments and borrowing instruments. • The process by which financial intermediaries transform funds provided by savers into funds used by borrowers

3. The Financial Intermediation Process USA UAE Savers Borrowers Financial Intermediary

4. Benefits of Intermediaries • Reduced costs • Risk/diversification • Funds divisibility/pooling • Financial flexibility • Related services

5. Types of Intermediaries • Commercial banks: An institution which accepts deposits, makes business loans, and offers related services. • Credit unions: association that makes small loans to its members at low interest rates and offers other banking services. • Thrift institutions: is a financial institution that obtains the majority of its funds from the savings of the public. • Mutual funds: uses its capital to invest in diversified securities of other companies. • Whole life insurance: that provides death protection for the insured's entire lifetime • Pension funds: A fund established by an employer to pay retirement benefits to employees.

6. Safety (Risk) of Financial Institutions • Banks, thrifts and credit unions • insured by FDIC: Federal Deposit Insurance Corporation • regulated by Federal Reserve • Insurance companies • regulated by states • Pensions • ERISA : Employee Retirement Income Security Act • Mutual funds • SEC: U.S. Securities and Exchange Commission UAE: Central Bank regulates all banks , Insurance companies regulated by Insurance authority.

7. Evolution of Banking Systems • Bank: • A financial institution licensed as a receiver of deposits. There are two types of banks: commercial/retail banks and investment banks. • In most countries, banks are regulated by the Federal Reserve (USA) or central bank (UAE).

8. Fractional Reserve System • Monetary policy at the basis of the modern banking system. Under FRS, banks are required to hold only a fraction (typically 12 percent) of the depositors' funds as cash reserves. The remaining 88 percent of deposited funds can be loaned out to create new deposits which in turn create new loans ... and so onNote: Basel I, Basel II, Basel III Standards

9. Central Banking - The Federal Reserve System • Manages the monetary policy of the country • Decentralized network of regional, district banks • Supervised by the Board of Governors, who are appointed by the President. • Banking regulations in the UAE • UAE Banks Federation (UBF) has an Advisory Council of Chief Executive Officers, consisting of the CEOs of the national banks in addition to the largest foreign banks. • The council oversees the implementation of the policies, follows up on UBF’s activities and makes the necessary decisions on all issues of concern to the banking sector. • Members of UBF has reached 51 Banks by 2012

10. Responsibilities of the Fed • Monetary Policy of the U.S. • To promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates UAE Monetary Policy: • The monetary authority ( Central Bank)of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability

11. International Banking • Other countries have fewer financial institutions, but with more branches • Foreign banks are allowed to engage in non-banking business activities • Most of the world’s largest banks are not U. S. banks • Edge Act • International Banking Facilities (IBFs)