ORGANIZATIONAL SET UP
OF
FINANCIAL
INSTITUTIONS
Functions of
Financial Institutions
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1.
2.
3.
4.
5.
6.
7.
Aids the flow of capital
Credit allocation
Provides economies of scale and scope
Satisfies the needs of general public
Provides specialization and expertise
Assists asset transformation
Offers INTERMEDIATION
Intermediation
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The process of transforming a secondary security
into a primary security by a financial institution.
It relates to financial investments by savors
cash
Savors
cash
Financial
Borrowers
Institutions
secondary
securities
primary
securities
Dis-intermediation
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The process of reversing or rejecting the transfer of
funds into the financial institutions.
This refers to the low deposit interest rates or high
operating costs charge to customers.
Illustration of Disintermediation
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The removing of Middlemen
The dis- or re-channeling funds flow from the FI
Changing Role to the Servicing of Markets
 Security
Investments
 Mutual Funds
 Insurance
Types of Intermediation
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1.
2.
3.
4.
Liquidity
Maturity
Denomination
Risk
Types of Financial Institutions
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By Banking Business Nature:
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Banks
Non-Banks
Non-Finance
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By Business Operations:
 Thrift
type
 Contractual type
 Investment type
 Other type
Thrift-type Financial Institutions
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Banks:
 Commercial
Banks
 Savings Banks
 Investment Banks (Merchant Banks)
 etc
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Non-Banks:
 Deposit-taking
Company, Savings and Loan, Home
Loans, Building Society,
 Credit Unions
Contract-type
Financial Institutions
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Insurance Companies:
 Life
Insurance
 Accident and Healthy Insurance
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Pension Funds:
 Mandatory
Providence Funds
 Retirement Funds/Pension Funds
Investment-type
Financial Institutions
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Investment Companies:
 Closed-end
Investment Companies - Investment Brokers
 Open-end Investment Companies - Mutual Funds/Unit
Trust
 Real Estate Trust Investment Companies
Other Financial Institutions
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Finance Companies
Factors Companies
Lease Companies
Mortgage Companies
Credit Card Companies
Non-finance Financial Institutions:
 General
Electric, Ford Motors, Toyota Motors
 wholesalers, Manufactures, Department Stores
Why Financial Institutions?
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Fulfill economic goals
Reduce transaction and information costs
Provide liquidity
Prevent risks
As transmission of monetary policy
Provide payment mechanism
Supply credit allocation
Analysis of Financial Institutions
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1.
2.
3.
4.
Transaction Costs
Information Asymmetry -- Moral Hazard
Financial Risks
Financial Innovation
Solution
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Information Asymmetry--Moral Hazard:
Information Symmetry and Full Disclosure
Regulation Reform
Financial Intermediation
Financial Risks:
Risk Management and Control
Burden Administration
Solutions
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Financial Innovations:
Enhance Internal Control-Planning, Control, and Administration
Tighten Asset Management and Quality
Modernized Operation System
Strengthen Regulation and Monitoring
Duties of the Management of
Financial Institutions
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1. Determining the optimal capital structure
Assets, Liabilities, and Capital
2. Managing interest rate/currency/credit risks
3. electing/Pricing investments and liabilities
Maturity Matching, Profit Making
4. Operating effectively
Information Processing
Communication Technology