Copyright © 2002 Pearson Education, Inc. Slide 12-1

Copyright © 2002 Pearson Education, Inc. Slide 12-2 Chapter 12 What Financial Institutions Do

Copyright © 2002 Pearson Education, Inc. Slide 12-3 Table 12.1 Financial Intermediaries in the United States

Copyright © 2002 Pearson Education, Inc. Slide 12-4 Securities Market Institutions Securities market institutions reduce matching costs and provide risk-sharing, liquidity, and information services. Investment banks help raise new capital in primary markets. Brokers and dealers help facilitate exchange in secondary markets. Securities may be traded through exchanges or in over-the-counter markets.

Copyright © 2002 Pearson Education, Inc. Slide 12-5 Investment Institutions Investment institutions raise funds to invest in loans and securities. Mutual funds convert small individual claims into diversified portfolios. Finance companies sell securities to make small loans to households and businesses.

Copyright © 2002 Pearson Education, Inc. Slide 12-6 Contractual Saving: Insurance Companies Contractual saving institutions transfer risk and provide means for disciplined savings. Insurance companies write contracts to protect risk of loss from particular events. “Law of large numbers” enables insurance companies to predict loss for large groups. Insurance companies face problems of adverse selection and moral hazard.

Copyright © 2002 Pearson Education, Inc. Slide 12-7 Figure 12.1 Financial Assets of U.S. Insurance Companies

Copyright © 2002 Pearson Education, Inc. Slide 12-8 Contractual Saving: Pension Funds Pension funds invest to provide for retirement benefits. Defined contribution plan: benefit is based on invested contributions. Defined benefit plan: benefit is based on earnings and years of service. Defined contribution plans are fully funded. Defined benefit plans may be underfunded.

Copyright © 2002 Pearson Education, Inc. Slide 12-9 Figure 12.2 Assets of Pension Funds

Copyright © 2002 Pearson Education, Inc. Slide Depository Institutions Commercial banks accept deposits and make loans and offer other services. Borrowers with smaller credit needs rely on depository institutions. Savings institutions suffered from maturity mismatch which led to a crisis. Credit union members work at the same firm or in the same industry.

Copyright © 2002 Pearson Education, Inc. Slide Government Financial Institutions Federal credit agencies make loans in the interest of public policy. U.S. government lends to farmers, to the housing market, and to students. U.S. government also guarantees loans made by private financial institutions.

Copyright © 2002 Pearson Education, Inc. Slide Table 12.2 Services Provided by Financial Intermediaries

Copyright © 2002 Pearson Education, Inc. Slide Financial Institutions: Blurring the Lines During the 1930s, barriers were created that restricted competition across providers. Now financial services are organized more by function than by provider identity. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 removed many of the regulatory lines among financial institutions.