1. Why Are Financial Intermediaries Special? Chapter 1 © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin

2. 1-2 Transactions without Financial Institutions Corporations (net borrowers) Households (net savers) Cash Equity & Debt Primary difference is direct transacting versus transformation Example of direct below:

3. 1-3 With FIs Cash HouseholdsCorporations Equity & Debt FI (Brokers) FI (Asset Transformers) Deposits/Insurance Policies Cash

4. 1-4 FIs are Middlemen!  Why should they exist? Reduce information costs Spread of risk Economies of scale Maturity intermediation Payment services

5. 1-5 Types of FIs  Depository institutions  Insurance Companies  Pension Funds  Investment Banks  Mutual Funds  Finance Companies

6. 1-6 Regulation of FIs  Safety + soundness  Monetary policy  Credit allocation  Consumer protection  Investor protection  Entry  Regulation is not costless

7. 1-7 Regulation  Safety and soundness regulation: Regulations to increase diversification  No more than 10 percent of equity to single borrower Minimum capital requirements Guaranty funds:  Deposit insurance fund (DIF):  Securities Investors Protection Fund (SIPC) Monitoring and surveillance.  FDIC monitors and regulates DIF participants.

8. 1-8 Additional Terms  Redlining  Negative externality  Disintermediation  Liquidity  Solvency  Information costs  Payment Services

9. 1-9 Trends in Assets Held by FIs