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Chapter 2: Financial Institutions

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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  1. Chapter 2: Financial Institutions • What Do Financial Mkts. & Institutions Do?

  2. 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

  3. 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!

  4. Mutual Fund Quote:

  5. Exchange Traded Funds

  6. 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.

  7. Recent Trends in Financial Institutions

  8. 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.

  9. 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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