Financial Intermediaries (7) Flashcards
What is a FINANCIAL INTERMEDIARY?
institutions that act as intermediaries between surplus spending units and deficit spending units, and put them in touch with one another.
main aim is to reduce costs and tailor/create new instruments to make them more attractive.
“depositary entities”
fundamental role in the economy
What are the main SERVICES financial intermediaries provide?
- transform risk through portfolio diversification
- transform maturity
- produce and manage payment and settlement mechanisms
- vehicle for monetary policy
What are the main BANKING OPERATIONS that financial intermediaries carry out?
- LIABILITY-SIDE BO - capturing resources
- equity
- borrowed funds - ASSET-SIDE BO - investment of captured resources
- according to risk
- according to level of regulation
- according to the counterparty
- according to currency they are denominated in
- according to the type - SERVICES OPERATIONS
- treasury services
- asset management
- life insurance
- customer reports
- ATMs, credit cards…
- services linked to securities operations - BRANCH SERVICES and ATM
capturing EQUITY
its true importance, more than as a means of capturing funds, is due to its key role in compliance with the solvency ratio, expansion, profit sharing…
EQUITY = k reserves
- Preferred Stock
SOLVENCY RATIO = k reserves + permanent financing
- Subordinated loans: no bailout or early redemption clauses, original term > 5 years, when <5 contribution to equity depreciates 20% per year
- General Risk Fund: funds belonging to the entity and not subject to any specific risk. requires previous authorisation from the bank of Spain
capturing BORROWED FUNDS
- Loans from the Bank of Spain
- Interbank Operations
- Client debits (most imp)
- current accounts or sight deposits
- ordinary savings accounts
- fixed-term deposits - Other liquid liabilities (increased in volume, finance rapid growth in loan investment)
- Repos
- Bank Bonds
- Mortgage Bonds
- Territorial Bonds - Bills and other payments obligations
Develop in the classification of ASSET-SIDE BO? (investment of captured resources)
According to RISK
- full risk
- conditional risk (3rd party guarantees, memo accounts)
According to level of REGULATION
- free
- regulated
According to the COUNTERPARTY
public sector // private sector // offshore
According to CURRENCY they are denominated in
euros // other
According to the TYPE
- loans, credits, overdraft on CA, trade discount, advanced payments for documentary credits, securities portfolio, fixed asset, guarantees offered…
What do SERVICE OPERATIONS consist on?
Activities carried out in behalf of 3rd parties, such as…
- treasury services
- asset management
- life insurance
- customer reports
- ATMs, credit cards…
- services linked to securities operations
Develop on ATMs and Branch Network
In spite of the development of alternative channels such as Online or Phone banking, branches are still a KEY ELEMENT for client capture and building customer loyalty.
Evolution: traditional passive model –> personalised customer services with high added value
branch network is complemented with an extensive ATM network
INCOME STATEMENT
requires a different approach that recognises the risks inherent to the banking actitivity
4 types of income
- net interest income
rate they pay for the funds - rate they receive from borrowers (assume IR risk and credit risk)
- fee income
- results from trading operations
gains/losses on financial transactions - other income (operating)
BALANCE SHEET
impossible to calculate from outside the bank, as it involves analysing its investment and financing structure, both in absolute and relative measures, and its evolution over time.
- the activity of a bank is in its BS in the form of change in the volume of credit investment, in the asset, and its comparison with the variations of deposits
- we can draw conclusions about the greater or lesses activity of the bank and the resources used to finance the granting of credits
SHADOW BANKING?
SHADOW BANKING = non-bank financing (MMF, FVC, crowdfunding…)
- it is a valuable alternative to bank financing and helps support real economic activity.
- it is also a good source of diversification of the credit supply of the banking system
- it provides healthy competition
HOWEVER it can become a source of systematic risk, though it has contributed to growth
How is the CURRENT STATE of the sector in SPAIN?
The sector has faced the reabsorption of 3 structural imbalances in a difficult conjecture…
- Strong DEPENDENCE on the international wholesale market
- EXCESSIVE INV in the property development market
- SURPLUS of installed capacity
- massive recapitalisation
- sector is healthy as a whole
