Financial Institutions and Money

Federal Reserve Bank

• Federal Reserve is the "King of the Kings", or bank of the banks. It was established by congress in 1913 to regulate banking system. The modern Fed has moved far beyond its original role as a *lender of last resort*. In particular, the Fed is now responsible for monetary policy • Central bank can act as a lender of last resort. • For savers there is another form of insurance provided by *Federal Deposit Insurance Corporation (FDIC)*

Non-bank Intermediaries

• *Hedge funds*, are similar to mutual funds in that they accept money from investors and use the funds to buy a portfolio of assets. Hedge funds typically try to maximize the profit of investors, they invest in riskier assets and charge higher fees. • *Investment banks* concentrate on providing advice to firms issuing stocks and bonds or considering mergers with other firms. They also perform underwriting. They are the "banks" of the firms.

Non-bank Intermediaries

• *Insurance companies* specialize in protecting their policyholders from the risk of financial losses associated with particular events. • For many people, saving for retirement is the most important form of saving. *Pension funds* invest contributions from workers and firms in stocks, bonds, and mortgages to earn the money necessary to pay pension benefit payments during workers' retirements. • A *mutual fund* obtains money by selling shares to investors. The mutual fund then invests the money in a portfolio of financial assets, such as stocks and bonds, and charges management fee for its services.

Commercial Banks

• Commercial banks play a key role in the financial system by taking in deposits from households and firms and investing most of those deposits, either by making loans to households and firms or by buying securities. • Most common financial actives banks carry are short term loans and credits, as well as very long term loans to households (mortgage)

Financial intermediaries

• Financial markets are created to match savers and borrowers. This matching is costly • Financial intermediaries buy this risk and do the matching in the market. They redirect funds form savers to borrowers. For borrowers it is indirect financing. • Direct financing is when funds flow from savers directly to borrowers.

Non-bank Financial Intermediaries

• Some non-bank financial intermediaries, like credit unions, saving banks, are also gathering funds from savers and redirect to borrowers. • Other financial intermediaries include insurance companies, pension funds, mutual funds, hedge funds, and investment banks. • These institutions also have a similar function in the financial system by channeling funds from savers to borrowers, although each of them specializes in a particular type of transaction.

Financial Market Services

• Three key services that the financial system provides to savers and borrowers: *risk sharing, liquidity, and information.* • Risk is the chance that the value of financial assets will change relative to expectation. • The second service that the financial system offers savers and borrowers is liquidity • A third service of the financial system is the collection and communication of information, or facts about borrowers and expectations of returns on financial assets.

Financial Institutions

The financial system sends funds from savers to borrowers. Borrowers pay returns back to savers through the financial system. Savers and borrowers include households(both domestic and foreign), businesses, and governments.