Non-Bank Financial Institutions Flashcards
Building Societies (AUS)
- What are they
- What do they specialise in
- How are they regulated
- Authorised Deposit-Taking Institutions (ADIs)
- Specialise in making mortgage loans funded from deposits
- Regulated in the same way as banks
Building Societies (NZ)
- What Act?
- How are funds raised
- Building Societies Act 1965
- Raised by the issue of shares to members usually by subscription
Credit Unions (AUS)
- What do they specialise in
- Are they ADIs
- Who owns and runs them
- Short term consumer loans
- Yes they are ADIs
- Owned and run by members
Credit Unions (NZ)
- What Act?
- Who supervises?
- Other aspects (3)
- Friendly Societies and Credit Unions Act 1982
- Supervised by RBNZ
- Non-Bank Deposit Takers
- Common link between members
- Invest savings and receive a dividend
Finance Companies (AUS Only)
- Specialise in what?
- Do they accept deposits?
- Rely on what for funding
- Types of finance companies (2)
- Consumer and business finance and leasing, also deal in many of the same product as banks, BS’ and CU’s
- No they don’t accept deposits
- Rely on short term funding (sale of commercial papers, notes, bonds, stocks)
- Sales and Niche
Types of consumer lending (2)
- Personal loans
- Business lending
Three types of financing under consumer lending
- Wholesale financing: Help a dealer finance the purchase of goods
- Retail financing: Sale of goods used for business purposes
- Lease financing: Provides tax advantages
Define factoring
When a company takes ownership of accounts receivable
Two Types of Non-Bank Lending Institutions (NBLI)
- NBDT such as credit unions and building societies
- Non-Deposit taking finance companies
What is the Deposit Compensation Scheme (DCS)
Covers customers of banks, BS, CU and Finance companies registered in NZ up to $100,000
Define insurance
Insurance is the transfer of pure risk to an entity that pools the risk of loss and provides a payment if a loss occurs
Define risk transfer
Shifting the responsibility of bearing risk from one party to another
Define pure risk and speculative risk
Pure risk is where 2 outcomes are possible: Loss or no loss
Speculative risk is where 3 outcomes are possible: Loss, no loss and gain
Define objective risk. How is it priced?
- The risk insurers face once accepting the risk from the insurance purchasers. Deviation between actual loss and expected loss.
- Priced to cover expected losses and expenses
Methods of reducing objective risk (5)
- Law of large numbers: More insurances, smaller deviation between expected and actual loss. Averages are easier to predict than individual occurrances.
- Underwriting: The selection and classification of insurable risks
- Co-Insurance: A loss sharing premium
- Restrictive covenants: Legal obligation to do or not do something
- Reinsurance: Insurers shift some risk to other insurance companies
Requirements of privately insurable risk (5)
- Must be a common risk
- Losses should be accidental
- Losses should be determinable and measurable
- Chance of loss should be calculable
- The insurance premium must be affordable
How do insurance companies make money
Collecting premiums that are pooled and used to pay claims. If premiums exceed total claims, then they have made an underwriting profit. Priced to cover expected claims, admin and must be competitive
Types of insurance (2 but also 4)
- Property: Insurance against direct and indirect loss to property
- Liability: Insurance against the peril of legal liability
(Also life and health)
Issues in insurance (2)
- Adverse selection
- Moral hazard
Types of investment companies (5)
- Statutory funds of life insurance offices
- Superannuation funds
- Exchange traded funds (ETF)
- Mutual funds
- Hedge funds
Investment strategies (4)
- Growth funds
- Aggressive growth funds
- Balanced funds
- Socially responsible investment funds
Define a closed ended fund
Initially sells shares to obtain cash to invest and then operates with a fixed number of shares outstanding
Define an open ended fund
Allows additional investment and withdrawal of funds
Benefits of a mutual fund (5)
- Liquidity intermediation
- Denomination intermediation
- Diversification
- Cost advantages
- Managerial expertise
Superannuation
- Defined benefit definition
- Accumulated fund definition
- Employer states benefit received at retirement
- Amount received at retirement depends on contributions made by employee and fund earnings
Define a hedge fund
Investment pools that use a combination of analytical techniques to develop financial models that identify, evaluate and execute trading decisions
- A special type of mutual fund managed aggressively
Goal of hedge funds
Provide consistent, above market returns while reducing risk
