Chapter 2

Restrictions on Entry

A charter from the state or the federal government is required to establish a financial institution. (Only good people with lots of money get these).

Financial regulation overseas is similar to here in the US. (T/F)

True (Japan, Canada, nations of Western Europe)

Securities and Exhange Commission (SEC)

Regulates the trading of stocks, bonds and the licenses of all brokers, advisors, etc. Requires disclosure of information and restricts insider trading.

Disclosure

Reporting requirements are stringent. Must follow certain rules, inspections, certain info must be public, etc (reduces adverse selection)

Restrictions on Assets and Activities

restrict financial intermediary from engaging in certain risky activities (ex: commercial banks and other depository institutions can't hold stock because stock prices fluctuate) (reduces moral hazard)

Investment Intermediaries

finance companies, mutual funds, hedge funds, and money market mutual funds

Restrictions on Interest Rates

restrictions on interest rates that can be paid on deposits.

deposit insurance

the government guarantees that a bank's depositors will be paid even if the bank can't come up with the funds, up to a maximum amount per account (FDIC is most imp.)

Credit unions

these financial intermediaries (depository institutions) are typically v small lending institutions organized around a group: union members, employees of a particular firm, etc. They acquire funds from shares and make consumer loans.

What are the three types of financial intermediaries?

Depository institutions, contractual savings institutions, and investment intermediares

U.S. banks are the least restrictive in the range of assets they may hold. (T/F)

False (they are the MOST restrictive)

Investment banks

NOT a bank or financial intermediary in the usual sense (does not take in funds and then lend them out). Helps corporations issue securities. 1. Advises firm on which type of securities to issue (stocks or bonds) 2. Helps sell (underwrite) the securities by buying them and the reselling them in the market. They act as deal makers and earn enormous fees by helping corporations acquire other companies through mergers or acquisitions.

Limits on Competition

Politicians have often declared that unbridled competition among financial intermediaries promotes failures that will harm the public (sometimes impose restrictions on the opening of additional locations (branches)).

Life insurance companies

are financial intermediaries (Contractual savings institutions) that insure people against financial issues following a death and sell annuities (annual income payment upon retirement). Largest of contractual saving institutions

Fire and casualty insurance companies

are financial intermediaries (Contractual savings institutions) that insure people from theft, fire, and accidents. (Greater possibility of loss if natural disaster occurs, so they buy more liquid assets than life insurance companies do)

Pension funds and government retirement funds

are financial intermediaries (Contractual savings institutions) that provide retirement income in the form of annuities to employees who are covered by a pension plan. (Funds are acquired by employers and employees. The establishment of pension funds has been encouraged by fed. gov. through legislation requiring pension plans and tax incentives to encourage contribution).

Mutual funds

are financial intermediaries (Investment Intermediaries) acquire funds by selling shares to many individuals and then using the proceeds to purchase diversified portfolios of stocks and bonds. (can be risky, since the value of mutual funds fluctuate greatly)

Money market Mutual funds

are financial intermediaries (Investment Intermediaries) that are similar to mutual funds and also feature deposit-type accounts. They sell shares to acquire funds, and then use the funds to buy money market instruments that are safe and very liquid. The interest on these assets is paid out to the shareholders.

Finance companies

are financial intermediaries (Investment Intermediaries) that raise funds by selling commercial paper (a short-term debt instrument) and by issuing stocks and bonds. They lend these funds to consumers, who use the money to buy furniture, cars, homes, small businesses.

Hedge funds

are financial intermediaries (Investment Intermediaries). They are a type of mutual fund with special characteristics. Limited partnerships with minimum investments ranging from $100,000 to more typically $1 million or more. These limitations mean that hedge funds are subject to weaker regulation.

commercial banks

are financial intermediaries (depository institutions) that raise funs primarily by issuing checkable deposits, saving deposits, and time deposits (deposits with fixed terms to maturity).

depository institutions

are financial intermediaries that accept deposits from individuals and institutions and make loans (Exs: Banks, S&L's, Credit Unions)

Contractual savings institutions

are financial intermediaries that acquire funds at periodic intervals on a contractual basis. (Exs: insurance companies, pension funds)

Savings and Loan Associations (S&Ls) and Mutual Savings Banks

these financial intermediaries (depository institutions) obtain funds through savings deposits (shares) and time and checkable deposits. (Compete with commercial banks)