Financial Institutions
Chapter 1.
Four pillars: chartered banks, insurance companies, trust companies and investment banks
Without FIs: monitoring cost, price risk and liquidity costs
With FIs: Broker Function and Asset transformation function
Act as broker by providing transaction and information services. They conduct research, make investment recommendations, and conduct purchase and sale of securities. They reduce transaction and information costs: more efficient.
Act as asset transformers: FI purchase financial claims issued by corporations and finance these purchases by selling financial claims to household investors.
FIs are better at resolving the issues of information cost, price risk and liquidity risks
FIs as delegated monitor and information provider
Secondary claims are more liquid
FIs have the ability to diversity away portfolio risk, by exploiting the benefits of size. Household savers are constrained to holding relatively undiversified portfolios.
Risk diversification allow FIs to better predict expected return
Reduced transaction cost: group asset purchase in bulk
NEGATIVE EXTERNALITIES
Deposit-taking institution less significant
Attributable to net regulatory burden imposed on traditional FIs (banks and insurance companies) and weakening of public trust and confidence
Merger activities
Online trading: reduced costs of direct access to financial markets
Global issues
Chapter 7: Risks of Financial Intermediation
Interest rate risk: mismatch of maturities of assets and liabilities
Short funded: maturity of liability less than asset; refinancing rate
Long funded: maturity of liability longer than asset; reinvestment rate
Market risk
Credit risk
Off-balance sheet risk
Foreign exchange risk
Country or sovereign risk
Technology and operational risk
Liquidity risk
Insolvency risk
Chapter 2: Deposit – Taking institutions
Governed by Bank Act under OSFI
Four principal assets: Canadian securities loan, business loans, mortgage
Four pillars: chartered banks, insurance companies, trust companies and investment banks
Without FIs: monitoring cost, price risk and liquidity costs
With FIs: Broker Function and Asset transformation function
Act as broker by providing transaction and information services. They conduct research, make investment recommendations, and conduct purchase and sale of securities. They reduce transaction and information costs: more efficient.
Act as asset transformers: FI purchase financial claims issued by corporations and finance these purchases by selling financial claims to household investors.
FIs are better at resolving the issues of information cost, price risk and liquidity risks
FIs as delegated monitor and information provider
Secondary claims are more liquid
FIs have the ability to diversity away portfolio risk, by exploiting the benefits of size. Household savers are constrained to holding relatively undiversified portfolios.
Risk diversification allow FIs to better predict expected return
Reduced transaction cost: group asset purchase in bulk
NEGATIVE EXTERNALITIES
Deposit-taking institution less significant
Attributable to net regulatory burden imposed on traditional FIs (banks and insurance companies) and weakening of public trust and confidence
Merger activities
Online trading: reduced costs of direct access to financial markets
Global issues
Chapter 7: Risks of Financial Intermediation
Interest rate risk: mismatch of maturities of assets and liabilities
Short funded: maturity of liability less than asset; refinancing rate
Long funded: maturity of liability longer than asset; reinvestment rate
Market risk
Credit risk
Off-balance sheet risk
Foreign exchange risk
Country or sovereign risk
Technology and operational risk
Liquidity risk
Insolvency risk
Chapter 2: Deposit – Taking institutions
Governed by Bank Act under OSFI
Four principal assets: Canadian securities loan, business loans, mortgage