Saunders & Cornett, Financial Institutions Management, 4th edition 1 “It is the ability to foretell what is going to happen tomorrow, next week, next month,

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Saunders & Cornett, Financial Institutions Management, 4th edition 1 “It is the ability to foretell what is going to happen tomorrow, next week, next month, and next year. And to have the ability afterwards to explain why it didn’t happen.” Sir Winston Churchill

Saunders & Cornett, Financial Institutions Management, 4th edition 2 What are Financial Intermediaries (FIs)? Financial Securities: contingent claims on future cash flows – debt, equity, derivatives, hybrids. All firms’ liabilities & net worth are predominately comprised of financial securities. But most firms hold real assets such as inventory, plant & equipment, buildings. FIs’ assets are predominately comprised of financial securities.

Saunders & Cornett, Financial Institutions Management, 4th edition 3 Transparent, Transluscent and Opaque FIs

Saunders & Cornett, Financial Institutions Management, 4th edition 4 What Services Do FIs Provide? Information Liquidity Reduced Transaction Costs Transmission of Monetary Policy Credit Allocation Payment Services Intergenerational Wealth Transfer

Saunders & Cornett, Financial Institutions Management, 4th edition 5 FIs are the most regulated of all firms. Safety and Soundness Regulation –Deposit Insurance Monetary Policy Regulation –Reserve Requirements Credit Allocation Regulation (eg., mortgages) Consumer Protection Regulation –Community Reinvestment Act, Home Mortgage Disclosure Act, Truth in Lending Protection Investor Protection Regulation Entry Regulation

Saunders & Cornett, Financial Institutions Management, 4th edition 6 Types of FIs Depository Institutions Insurance Companies Securities Firms and Investment Banks Mutual Funds Finance Companies Distinctions blurred by the Gramm-Leach- Bliley Act of 1999 that created Financial Holding Companies (FHCs).

Saunders & Cornett, Financial Institutions Management, 4th edition 7 Features Common to Most FIs High Amount of Financial Leverage –Low equity/assets ratios. Capital requirements. Off-balance sheet items –Contingent claims that under certain circumstances may eventually become balance sheet items (ex. Derivatives, commitments) Revenue: Interest Income & Fees Costs: Interest Expenses and Personnel

Saunders & Cornett, Financial Institutions Management, 4th edition 8 Depository Institutions Commercial Banks: accept deposits and make loans to consumers and businesses. –Money Center Banks: Citigroup, Bank of NY, BankOne, Bankers Trust (Deutschebank), JP Morgan Chase and HSBC Bank USA. Savings Associations (S&Ls) –Qualified Thrift Lender (QTL) mortgages must exceed 65% of thrift’s assets. Savings Banks –Use deposits to fund mortgages & other assets. Credit Unions –Nonprofit mutually owned institutions (owned by depositors).

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