Topic 3 – Non-bank Financial Institutions Flashcards
There exists a wide range of NBFIs which are able to compete within a modern financial system.
These include:
- 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
Investment Banks
- 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.
Investment Banks Sources of Funds
Borrowing in the short-term money market
Mainly offshore money market securities
Investment Banks Uses of Funds
- 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.
Investment Banks and Financial Innovators
- The development of sophisticated off-balance-sheet products and advisory services.
- Principal income is the fee income
Off-balance-sheet business for Investment Banks
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
Off-balance-sheet business for Investment Banks (Operate as Foreign Exchange dealers)
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
Off-balance-sheet business for Investment Banks (Act as an Underwriter of new share and bond issues)
advise and provide UNDERWRITING arrangements for clients making new debt and equity issues.
Off-balance-sheet business for Investment Banks (Placement services)
Assist clients to place large parcels of debt and equity securities to institutional investors.
Off-balance-sheet business for Investment Banks (Risk Management)
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
Off-balance-sheet business for Investment Banks (Advise corporate clients on Mergers and Acquisitions)
- 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.
Off-balance-sheet business for Investment Banks
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
underwriting
service whereby the investment bank agrees to buy new securities issued by a client that are not bought by investors.
Managed Funds
Provide direct access to wholesale investment markets for pooled savings of individuals
Benefits of Managed Funds
Professional expertise,
administrative efficiency,
Economies of scale,
better diversification platform.
Managed Investments Act 1998 (Cwlth) requires
Responsible entity (trustee and manager) Trust deed
Trust deed
legal document detailing the sources, uses, and disbursement of funds in a trust
There are four main categories of Managed Funds
Public Unit trust funds
Superannuation funds
Cash management trust
Hedge funds
Managed funds could also be categorized by the investment risk profile
Capital Guaranteed
Capital Stable
Balanced Growth
Managed Growth or Capital Growth
Capital Guaranteed
The value of contributions to the fund are guaranteed, but future earnings are not
Capital Stable
Contributions are mostly protected as the fund invests in low-risk securities
Balanced Growth
Investments target longer-term income streams supported by limited capital growth
Managed Growth or Capital Growth
Invests to obtain greater return through capital growth and lower income streams
Public Unit Trusts
- 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
Listed Trusts
units quoted and sold on the ASX (highly liquid) – 34%
Unlisted Trusts
units bought and sold by trustee (less liquid) – 66%
Type of unit trusts
Property trusts (31%); Equity trusts (47%); Mortgage trusts (4%); Other (including Fixed interest trusts) (18% approx.).
Superannuation Funds
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).
Types of superannuation funds
Corporate Industry Public sector Retail SMSF Compulsory Superannuation Funds Rollover Funds
Superannuation Uses of Funds
- highly diverse investments
- large proportion in equities and unit trusts
- Approx. 20% invested overseas
Legislation directly impacting on the operation of superannuation funds
Superannuation Industry (Supervision) Act 1993 (Cwlth) (SIS) Income tax Assessment Act 1936
Cash Management Trusts (CMT)
invests the accumulated savings of individuals mainly in wholesale money market securities
Hedge Funds
invests in exotic financial products mainly for high net worth individuals and institutional investors
Hedge Funds include use of
short selling and derivatives with the aim of generating positive returns regardless of overall market performance.
Life Insurance Offices
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.
Life Insurance Offices sources of funds
Obtained from issuing policies
Life Insurance Offices examples of policies
Whole-of-life policy Term-life policy Total and permanent disablement policy Trauma policy Income protection policy Business overheads policy
Whole-of-life policy
- 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.
Business overheads policy
coverage if specified day-to-day operating expenses in the event of business disruption.
Life Insurance Offices uses of funds
majority held in equities and unit trusts, property, in both domestic and international markets.
General Insurance Policies
Contractual savings institutions
Company pays the insured a pre-determined amount on the occurrence of some pre-specified event.
General Insurance Policies Sources of funds
Premiums paid in advance (contractual) Funds source not as stable as for life insurance offices Examples: - House and contents insurance - Motor vehicle insurance
General Insurance Policies Uses of funds
generally invests in shorter dated securities
Examples: bills, CDs, commercial paper, T-notes.
due to the less predictable nature of the risks underwritten.
General Insurance Policies types
Home and Contents
Motor Vehicle Insurance
Home contents insurance
- 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;
co-insurance clause
if an asset is under-insured the policy will only cover the proportional value insured.
Home Contents perils include
fire, explosion, natural disasters, malicious acts, theft, external impact, storm and water damage;
Home Contents exclusions include
some natural disasters such as earthquakes, floods.
Motor vehicle insurance
Comprehensive
Third party, fire, and theft
Third-party policy
Compulsory third-party
Comprehensive vehicle
covers damage to named vehicle plus third-party vehicles and property.
Third party, fire, and theft
covers named vehicle for fire or theft plus third-party vehicles and property.
Third-party policy
only covers third-party vehicle and property.
Compulsory third-party
covers bodily injury resulting from a motor vehicle accident.
Finance Companies and General Financiers Source of Funds
- Borrowings from related corporations
- Loans from banks
- Issue of debentures and unsecured notes
- Borrowings from overseas
Finance Companies and General Financiers Uses of funds
- Lease financing
- Loans to businesses (e.g. bills finance, term loans, floor plan financing, factoring and accounts receivable financing).
Building Societies
Authorised Deposit taking institutions that primarily give loans to customers to buy residential property
Have had difficulty competing since deregulation of the financial sector.
Building Societies sources of funds
Mainly deposits from household sector
Building Societies uses of funds
mainly owner-occupier housing finance
Commercial loans
Credit Unions
ADI that accept retail deposits and provide loans to members
Common bond of association often exists between members due to employment, industry or community
Credit Unions Sources of funds
Mainly deposits from members (payroll deductions)
Also issuance of promissory notes
Credit Unions
Primarily personal finance to members:
- Residential housing loans
- Personal loans and credit card facilities
Merger and Acquisitions
Takeover company seeking to gain control over a target company
Spin Off
Part of the company is seperated from the whole and begins existance as independant company
Horizontal Takeover
in the same business
Vertical takeover
merger company operates in a business related to that of takeover company
Conglomerate Takeover
merger compnay operates in buiness unrelated to the existing business of takeover company
Hostile Takeover
When the target company rejects merger proposal of takeover company
Value added from merger (Synergy)
Economies of Scale
Finance Advantages - greater capacity to extend debt funding
Competitive Growth Opportunities
Business Diversification
Role of investment bank in a merger
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
APRA classifies Superannuation funds as
- > 4 members
- Pooled superannuation trusts
- Small APRA funds (< 5 members)
- SMSF
- Balance of life office statutory funds
Corporate Superannuation Funds
Employee contributes to a fund established for the benefit of an employee
Industry Superannuation Funds
Fund for all employees in a specific industry
Public Sector Superannuation Fund
A government sponsored fund for benefit of government employees
Retail Superannuation Funds
Funds operated by financial institutions and memebership is open
SMSF
private superannuation fund, regulated by the Australian Taxation Office (ATO) that you manage yourself. SMSFs can have up to four members
Rollover Fund
Holds existing eligible termination payments within the regulated superannuation environment
