Fintech Chapter 4: Financial Institutions
“We need banking…but not banks!” -Bill Gates
Figure 4.1 Large Commercial Banks
Role of Financial Intermediaries Information Asymmetries Moral Hazard Adverse Selection
Importance of Financial Institutions Intermediation Diversification Information and Contracting Efficiencies Payments Security. Cost Savings
Financial Institutions Commercial Banks Investment Banks Credit Unions Central Banks Insurance Companies, Finance Companies, Hedge Funds, Mutual Funds, ETFs Shadow Banking: Other Financial Intermediaries
Commercial Bank Services-Retail Checking and savings accounts Certificates of deposit Mortgages on residential and investment properties Home equity and other lines of credit Credit card lending Student loans New and used car, motorcycle and boat loans Foreign exchange and remittance transfers Stock brokerage Wealth management Private banking Insurance
Commercial Bank Services-Institutional Loans to financial and non-financial companies and governments Cash management and other corporate treasury services Leasing Commercial real estate Trade finance – letters of credit, bill collection, and factoring. Human resources services
Commercial Bank Services-Risks Credit risk Interest rate risk Trading risk Operational risk
Investment Banks Investment Banks
Investment Bank Services Public offering of securities Trading Private Placements Securitizations Mergers and Acquisitions Merchant Banking Restructuring Advice Securities Finance Prime Brokerage Clearing and Custody Services Origination and Trading of Derivatives Asset Management
Figure 4.2: Investment Bank Revenue Sources
Figure 4.3: Investment Bank Revenue in Equity Markets
Figure 4.4: Investment Bank Revenue in Bond Markets
Figure 4.5 Global Investment Banking Revenue and Market Share (01Jan – 03Jul 2017)
Investment Bank Activities Trading Research Asset Securitization M & A Prime Brokerage
Credit Unions Credit Unions
Central Banks Central Banks
US Fed: Roles Regulating and overseeing financial institutions; Providing financial services to the banking system; Executing monetary policy in support of macroeconomic goals; Acting as lender of last resort Providing banking services to the U.S. government Issuing currency
US Fed: Policy Tools Open market operations The Discount rate Reserve requirements Unconventional tools: Quantitative Easing
Historical Innovation in Big Financial Institutions
Shadow Banking: Other Financial Intermediaries Investment banks Mortgage lenders Money market funds Insurance companies Hedge funds Private equity funds Payday lenders
Fintech Applications Fintech Applications Challenger banks Atom Bank, Monzo Bank, Starling Bank, and Tandem Zopa Klarna “World’s Best Digital Bank”: DBS