Other Institutions Economics 71a Spring 2007 Mayo, Chapter 4 Lecture notes 2.4

Institutions Commercial banks Investment managers Mutual funds Pension funds Hedge funds Money market mutual funds Insurance companies Others

Commercial Banks  Consumers Deposits/savings Lending/transactions  Consumer loans  Home mortgages  Checking accounts  Credit cards  Debit cards  Foreign exchange  Brokerage (recent)

Commercial Banks  Firms Cash management Lines of credit  Loan of varying magnitude  Similar to credit card Bank loans (term loans)

Commercial Banks  Intermediary roles Between lenders and borrowers Repackaging financial products  Regulatory environment Key aspect of monetary policy Federal Deposit Insurance Corporation (FDIC) Federal Reserve System

Related Institutions  Thrifts (S&L’s)  Credit unions

Bank Regulations  Reserve requirements Deposits with specific banks Cash  Deposit insurance/FDIC $100,000 per account limit  Bank failures and bank runs

Bank/Investment Bank Separation  Banks versus Investment Banks The Glass-Steagall act (1933) Repealed 1999  Now separation is not required  Example: Citigroup

Investment Managers  Mutual funds  Pension funds  Hedge funds

Mutual Funds  Function Consumer investments -> Firms  Types Stock (invest in stock market portfolios) Money market (short term lending to firms) Bond Real Estate

Mutual Funds  Allow consumers to better diversify  Gather and process investment information  Major industry in Boston

Pension Funds  Manage/invest employee savings/pension plans  Similar in spirit to mutual funds  Hired by employer

Retirement Systems  Defined benefit Contributions to employer Receive formula at retirement Do not control assets  Defined contribution Contributions made to employees own account Receive lump sum at retirement Employee controls assets Transferable/increasing

Hedge Funds  Large investors  Less regulation  Broader strategies Derivatives Short sales More risk??  Growing fast

Money Market Funds  Purchase only low risk securities Government bonds  Treasury bills, Treasury bonds  Tax anticipation notes Short term corporate debt  Commercial paper International low risk securities

Insurance Companies  Insure individual and corporate risks  Receive payments (insurance premia)  Payout for losses  New issues Trading insurance policies Derivatives High tech risk management

Others  Information and software services Bloomberg Quicken Microsoft Yahoo Google