Financial Intermediaries

Résumé du document

Funds can move from lenders to borrowers via indirect finance involving financial intermediaries. Financial intermediaries borrow funds from lenders/savers and then provide funds to borrowers/spenders. If it is a commercial bank it acquires funds by issuing a liability to the public in the form of saving deposits and then loans to others. Other intermediaries will borrow from savers and then pass on to the borrowers. The process of using indirect finance via financial intermediaries is called financial intermediation. Why to intermediaries exist? Intermediaries have lower transaction costs. They also benefit from higher diversification and therefore, lower risk. They are experts at managing asymmetric information i.e. the borrower has more information than the lender.

Extraits

[...] Investors can basically cash out whenever they wish In a closed fund, the fund does not issue or buy back shares, the total amount of shares is closed when the fund is formed. An investor who wishes to sell must sell to another investor. Closed end funds are listed on stock exchanges and trade as if they were stocks. Closed end funds often trade on exchanges slightly below their NAVs. Being a collection of many stocks, you may have thought that picking a mutual fund might be easy. Not necessarily . there are over 10,000 mutual funds to choose from. It is easier to think of mutual funds in categories. [...]

[...] Large implies greater than billion. These "blue-chip" funds tend to be well-established corporations and tend to pay dividends. Mid-Cap Funds - These funds invest in mid-sized companies whose market value is more in the range of billion to billion. Small-Cap Funds - These funds invest in emerging companies whose market value, is less than billion. These companies tend to use profits to grow rather than pay dividends. Investments 4-26 Nonbank Finance – Mutual Funds (cont.) Index funds map a chosen index. [...]

[...] Foreign Funds - These funds invest primarily outside the U.S. Country Specific Funds - These funds focus on one country or region of the world. Emerging Markets Funds - These funds focus on small developing country and are considered very risky. Sector funds choose to invest in a particular industry or segment of the market. Examples of sectors include automotive, technology, baking, air transportation, biotechnology, health care and utilities. Sector funds are considered less diversified than most mutual funds, but they do offer diversification within a particular industry. [...]

[...] Insurance, like banking, is another form of financial intermediation. Insurance companies use the premiums paid on policies to invest in assets such as bonds, stocks, mortgages and other loans The earnings from these assets are used to pay claims on policies Investments 4-37 Nonbank Finance – Pension Funds Pension Funds provide the public with another type of protection: income payments on retirement Financial intermediation in this case is investing worker contributions in preparation for his or her retirement Benefits paid out of the pension fund each year are highly predictable so pension funds normally invest in long-term, low risk portfolios A second characteristic to pension plans is their vesting, or the length of time that a person must contribute before being entitled to receive benefits And as we have all seen, both public and private pension funds are faced with the declining number of active people contributing in comparison to a growing number of people receiving benefits. [...]

[...] The bank you own has the following balance sheet. If the bank suffers a deposit outflow of $50 million with a required reserve ratio of what actions would you take to keep the bank from failing? Investments 4-44 The $50 million deposit outflow means that reserves fall by $50 million to $25 million. Since required reserves are $45 million (10 percent of the $450 million of deposits), your bank needs to acquire $20 million of reserves. You could obtain these reserves by either calling in or selling off $20 million of loans, by borrowing $20 million in discount loans from the Fed, by borrowing $20 million from other banks or corporations, by selling $20 million of securities, or by some combination of all of these. [...]