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zMoney and Capital Markets > Topic 3 – Non-bank Financial Institutions > Flashcards

Topic 3 – Non-bank Financial Institutions Flashcards

1
Q

There exists a wide range of NBFIs which are able to compete within a modern financial system.
These include:

A
  • Investment Banks
  • Life and General Insurance Offices
  • Superannuation Funds
  • Finance Companies and General Financiers
  • Building Societies(ADIs)
  • Credit Cooperatives(ADIs)
  • Cash management trusts and Unit Trusts
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2
Q

Investment Banks

A
  • not licenced under APRA,
  • Are officially classified as ‘money market corporations’.
  • Account for 1.9% of total assets in March 2010 and declined since then to 0.4% (December 2018).
  • Investment banks grew as specialist finance facilitators.
    Examples: Macquarie Group, UBS, Credit Suisse, Citi Bank, etc.
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3
Q

Investment Banks Sources of Funds

A

Borrowing in the short-term money market

Mainly offshore money market securities

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4
Q

Investment Banks Uses of Funds

A
  • Limited lending to clients (extensively includes corporations and government)
  • usually on short-term basis
  • May at times also provide financial services to high-net-worth individuals.
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5
Q

Investment Banks and Financial Innovators

A
  • The development of sophisticated off-balance-sheet products and advisory services.
  • Principal income is the fee income
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6
Q

Off-balance-sheet business for Investment Banks

A

Operate as Foreign Exchange dealers
Act as an Underwriter of new share and bond issues
Placement services
Risk Management
Advise corporate clients on Mergers and Acquisitions
Project finance

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7
Q

Off-balance-sheet business for Investment Banks (Operate as Foreign Exchange dealers)

A

quote both bid (buy) and offer (sell) prices on all major currencies
E.g.: AUD/USD 0.7518- 22
The price maker dealer will buy 1 AUD for USD 0.7518 and sell 1 AUD for USD 0.7522

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8
Q

Off-balance-sheet business for Investment Banks (Act as an Underwriter of new share and bond issues)

A

advise and provide UNDERWRITING arrangements for clients making new debt and equity issues.

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9
Q

Off-balance-sheet business for Investment Banks (Placement services)

A

Assist clients to place large parcels of debt and equity securities to institutional investors.

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10
Q

Off-balance-sheet business for Investment Banks (Risk Management)

A

Analyze and identify clients’ financial, business and operational risk exposures
- Risk may include interest rates foreign exchange, liquidity, credit, investment, fraud and disaster risk exposures.
advise clients on alternative risk management strategies
provide risk management products to support advice
example: derivatives

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11
Q

Off-balance-sheet business for Investment Banks (Advise corporate clients on Mergers and Acquisitions)

A
  • identify potential merger targets;
  • evaluate merger proposals for clients;
  • may act for the acquiring corporation;
  • develop takeover funding strategies;
  • may defend for the target corporation.
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12
Q

Off-balance-sheet business for Investment Banks

A

Lending for large projects where loan repayments are based on projected cash flows

  • conduct feasibility studies;
  • advise on project viability and funding structures
  • bring potential project partners together
  • manage the financial implementation of a project
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13
Q

underwriting

A

service whereby the investment bank agrees to buy new securities issued by a client that are not bought by investors.

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14
Q

Managed Funds

A

Provide direct access to wholesale investment markets for pooled savings of individuals

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15
Q

Benefits of Managed Funds

A

Professional expertise,
administrative efficiency,
Economies of scale,
better diversification platform.

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16
Q

Managed Investments Act 1998 (Cwlth) requires

A 
Responsible entity (trustee and manager)
Trust deed
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17
Q

Trust deed

A

legal document detailing the sources, uses, and disbursement of funds in a trust

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18
Q

There are four main categories of Managed Funds

A

Public Unit trust funds
Superannuation funds
Cash management trust
Hedge funds

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19
Q

Managed funds could also be categorized by the investment risk profile

A

Capital Guaranteed
Capital Stable
Balanced Growth
Managed Growth or Capital Growth

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20
Q

Capital Guaranteed

A

The value of contributions to the fund are guaranteed, but future earnings are not

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21
Q

Capital Stable

A

Contributions are mostly protected as the fund invests in low-risk securities

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22
Q

Balanced Growth

A

Investments target longer-term income streams supported by limited capital growth

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23
Q

Managed Growth or Capital Growth

A

Invests to obtain greater return through capital growth and lower income streams

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24
Q

Public Unit Trusts

A
  • Investors purchase a share in the trust in the form of a ‘unit’
  • The trustee pools the funds received from investors and invests them
  • Unit holders receive a return in the form of capital gain or income

Can be either:
- Listed Trusts or Unlisted Trusts

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25
Q

Listed Trusts

A

units quoted and sold on the ASX (highly liquid) – 34%

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26
Q

Unlisted Trusts

A

units bought and sold by trustee (less liquid) – 66%

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27
Q

Type of unit trusts

A 
Property trusts (31%); 
Equity trusts (47%); 
Mortgage trusts (4%); 
Other (including Fixed interest trusts) (18% approx.).
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28
Q

Superannuation Funds

A

Represents long-term savings accumulated to fund an individual’s retirement.

Sector is rapidly expanding due to the implementation of the compulsory superannuation guarantee contribution (SGC).

Total superannuation assets nearly $2.8 trillion as at December 2018 (28% of total financial assets).

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29
Q

Types of superannuation funds

A 
Corporate
Industry 
Public sector
Retail
SMSF
Compulsory Superannuation Funds
Rollover Funds
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30
Q

Superannuation Uses of Funds

A
  • highly diverse investments
  • large proportion in equities and unit trusts
  • Approx. 20% invested overseas
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31
Q

Legislation directly impacting on the operation of superannuation funds

A 
Superannuation Industry (Supervision) Act 1993 (Cwlth) (SIS)
 Income tax Assessment Act 1936
32
Q

Cash Management Trusts (CMT)

A

invests the accumulated savings of individuals mainly in wholesale money market securities

33
Q

Hedge Funds

A

invests in exotic financial products mainly for high net worth individuals and institutional investors

34
Q

Hedge Funds include use of

A

short selling and derivatives with the aim of generating positive returns regardless of overall market performance.

35
Q

Life Insurance Offices

A

are contractual savings institutions

Insurance contracts generate premium income

Policyholder, or beneficiary, will receive a future defined payment on the occurrence of a specified event.

36
Q

Life Insurance Offices sources of funds

A

Obtained from issuing policies

37
Q

Life Insurance Offices examples of policies

A 
Whole-of-life policy
Term-life policy
Total and permanent disablement policy
Trauma policy
Income protection policy
Business overheads policy
38
Q

Whole-of-life policy

A
  • includes a risk component (life cover: sum insured) and investment component (bonuses);
  • surrender value if policy is cancelled;
  • policy will pay sum insured plus accumulated bonuses.
39
Q

Business overheads policy

A

coverage if specified day-to-day operating expenses in the event of business disruption.

40
Q

Life Insurance Offices uses of funds

A

majority held in equities and unit trusts, property, in both domestic and international markets.

41
Q

General Insurance Policies

A

Contractual savings institutions

Company pays the insured a pre-determined amount on the occurrence of some pre-specified event.

42
Q

General Insurance Policies Sources of funds

A 
Premiums paid in advance (contractual)
Funds source not as stable as for life insurance offices
Examples:
- House and contents insurance
- Motor vehicle insurance
43
Q

General Insurance Policies Uses of funds

A

generally invests in shorter dated securities

Examples: bills, CDs, commercial paper, T-notes.

due to the less predictable nature of the risks underwritten.

44
Q

General Insurance Policies types

A

Home and Contents

Motor Vehicle Insurance

45
Q

Home contents insurance

A
  • protection in the event of loss or damage to a house and its contents;
  • will incorporate public liability insurance
  • must ensure property is not under-insured (co-insurance clause)
  • a policy will include a range of perils which are covered, plus exclusions;
46
Q

co-insurance clause

A

if an asset is under-insured the policy will only cover the proportional value insured.

47
Q

Home Contents perils include

A

fire, explosion, natural disasters, malicious acts, theft, external impact, storm and water damage;

48
Q

Home Contents exclusions include

A

some natural disasters such as earthquakes, floods.

49
Q

Motor vehicle insurance

A

Comprehensive

Third party, fire, and theft

Third-party policy

Compulsory third-party

50
Q

Comprehensive vehicle

A

covers damage to named vehicle plus third-party vehicles and property.

51
Q

Third party, fire, and theft

A

covers named vehicle for fire or theft plus third-party vehicles and property.

52
Q

Third-party policy

A

only covers third-party vehicle and property.

53
Q

Compulsory third-party

A

covers bodily injury resulting from a motor vehicle accident.

54
Q

Finance Companies and General Financiers Source of Funds

A
  • Borrowings from related corporations
  • Loans from banks
  • Issue of debentures and unsecured notes
  • Borrowings from overseas
55
Q

Finance Companies and General Financiers Uses of funds

A
  • Lease financing
  • Loans to businesses (e.g. bills finance, term loans, floor plan financing, factoring and accounts receivable financing).
56
Q

Building Societies

A

Authorised Deposit taking institutions that primarily give loans to customers to buy residential property

Have had difficulty competing since deregulation of the financial sector.

57
Q

Building Societies sources of funds

A

Mainly deposits from household sector

58
Q

Building Societies uses of funds

A

mainly owner-occupier housing finance

Commercial loans

59
Q

Credit Unions

A

ADI that accept retail deposits and provide loans to members

Common bond of association often exists between members due to employment, industry or community

60
Q

Credit Unions Sources of funds

A

Mainly deposits from members (payroll deductions)

Also issuance of promissory notes

61
Q

Credit Unions

A

Primarily personal finance to members:

  • Residential housing loans
  • Personal loans and credit card facilities
62
Q

Merger and Acquisitions

A

Takeover company seeking to gain control over a target company

63
Q

Spin Off

A

Part of the company is seperated from the whole and begins existance as independant company

64
Q

Horizontal Takeover

A

in the same business

65
Q

Vertical takeover

A

merger company operates in a business related to that of takeover company

66
Q

Conglomerate Takeover

A

merger compnay operates in buiness unrelated to the existing business of takeover company

67
Q

Hostile Takeover

A

When the target company rejects merger proposal of takeover company

68
Q

Value added from merger (Synergy)

A

Economies of Scale
Finance Advantages - greater capacity to extend debt funding
Competitive Growth Opportunities
Business Diversification

69
Q

Role of investment bank in a merger

A 
Analysis
Valuation
Establish contacts
Negotiation	
Due Diligence
Nature of Takeover
Communicating to the market
Project management and integration
Seeks to faciliatate the transaction on behalf of the client
70
Q

APRA classifies Superannuation funds as

A
  • > 4 members
  • Pooled superannuation trusts
  • Small APRA funds (< 5 members)
  • SMSF
  • Balance of life office statutory funds
71
Q

Corporate Superannuation Funds

A

Employee contributes to a fund established for the benefit of an employee

72
Q

Industry Superannuation Funds

A

Fund for all employees in a specific industry

73
Q

Public Sector Superannuation Fund

A

A government sponsored fund for benefit of government employees

74
Q

Retail Superannuation Funds

A

Funds operated by financial institutions and memebership is open

75
Q

SMSF

A

private superannuation fund, regulated by the Australian Taxation Office (ATO) that you manage yourself. SMSFs can have up to four members

76
Q

Rollover Fund

A

Holds existing eligible termination payments within the regulated superannuation environment

zMoney and Capital Markets (10 decks)

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