Lecture 3 Flashcards
Financial intermediation = ?
The process by which savings are accumulated in depository institutions and then lent or invested
What are the 4 financial institutions categories?
Depository institutions
Contractual savings institutions
Securities firms
Finance firms
What do depository institutions do?
Accept deposits/savings from individuals
Then lend pooled deposits to businesses, governments and individuals
What are examples of depository instituons?
Commercial banks
thrift institutions (savings banks, savings & loan associations, credit unions)
What are commercial banks?
Depository institutions that accept deposits, issue check-writing accounts, and make loans to businesses and individuals
What are thrift institutions?
Noncommercial bank depository institutions that accumulate individual savings and primarily make consumer and mortgage loans
What do savings banks do?
accept the savings of institutions & lend pooled savings to individuals mainly in the form of mortgage loans
What do savings & loan associations (S&Ls) do?
S&Ls accept individual savings and lend pooled savings to individuals (primarily as mortgage loans) and businesses
What do credit unions do?
Cooperative nonprofit organisations that exist primarily to provide member depositors with consumer credit
Consumer credit = ?
allows consumers to borrow money or incur debt
What are contractual savings organisations?
Organisations collect premiums and contributions from participants and provide insurance against major financial losses & retirement
Use the pooled funds to purchase debt and equity securities of business firms
What are examples of contractual savings organisations?
Insurance companies
Pension funds
What are insurance companies?
Provide financial protection to individuals and businesses for life, property, liability and health uncertainties
What are pension funds?
Receive contributions from employees and/or their employers and invest the proceeds on behalf of the employees
What do securities firms do?
Accept and invest individual savings and also facilitate the transfer of existing securities between investors
What are examples of securities firms?
Investment companies
Investment banking firms
Mutual funds
Brokerage firms
What are investment companies?
They sell shares in their firms to individuals and invest the pooled proceeds in corporate and government securities
What are mutual funds?
Open-end investment companies that issue unlimited shares to investors & use pooled proceeds to purchase corporate & government securities
What do investment banking firms do?
Sell or market new securities issued by businesses to individuals and institutional investors
What do brokerage firms do?
Assist individuals to purchase new or existing securities or sell previously purchased sexurities
What are finance firms?
They provide loans directly to consumers and businesses
What are finance companies?
They provide loans directly to consumers and businesses
What are mortgage banking firms?
They originate mortgage loans on homes and other real property by bringing together borrowers and institutional investors
What are examples of finance firms?
Finance companies
Mortgage banking firms
What are the 5 ways that savers and investors can invest via financial institutions?
Making deposits to commercial banks
Purchasing shares in mutual funds
Purchasing securities at IB firms and brokerages
Paying premiums to insurance companies
Making contributions to pension funds
How are savers’ investments in financial institutions passed onto business firms?
The financial institutions either purchase debt & equity securities from the business firms or make loans and purchase debt securities
What do commercial banks do?
Accept deposits, make loans and issue check writing accounts
What do investment banks do?
Help businesses sell their securities to raise financial capital
What do universal banks do?
Banks that engage in both commercial banking and investment banking activities
How do indirect investment transfers via commercial banks work?
Savers pay commercial banks in return for CD’s
Commercial banks pay business firms in return for the firms note (a promise to repay the loan)
How do indirect investment transfers work via an investment bank?
Savers pay the investment bank for the business firm’s securities
The investment bank either buys then resells the business firm’s securities to savers or just markets them to savers
