“It is the ability to foretell what is going to
happen tomorrow, next week, next month, and
next year. And to have the ability afterwards
to explain why it didn’t happen.”
Sir Winston Churchill
Saunders & Cornett, Financial
Institutions Management, 4th edition
1
What are Financial
Intermediaries (FIs)?
• Financial Securities: contingent claims on future
cash flows – debt, equity, derivatives, hybrids.
• All firms’ liabilities & net worth are
predominately comprised of financial securities.
• But most firms hold real assets such as inventory,
plant & equipment, buildings.
• FIs’ assets are predominately comprised of
financial securities.
Saunders & Cornett, Financial
Institutions Management, 4th edition
2
Transparent, Transluscent and Opaque FIs
Financial Intermediation: The Flow of Funds and Primary Securities
Funds Surplus Units
Brokers
Funds Deficit Units
Funds Surplus Units
Dealers
Funds Deficit Units
Funds Surplus Units
Underwriters
Investment Banks
Funds Deficit Units
Funds Surplus Units
Mutual Funds
Funds Deficit Units
Funds Surplus Units
Banks
Funds Deficit Units
Funds Surplus Units
Insurance Companies
Funds Deficit Units
Saunders & Cornett, Financial
Institutions Management, 4th edition
3
What Services Do FIs Provide?
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Information
Liquidity
Reduced Transaction Costs
Transmission of Monetary Policy
Credit Allocation
Payment Services
Intergenerational Wealth Transfer
Saunders & Cornett, Financial
Institutions Management, 4th edition
4
FIs are the most regulated of all
firms.
• Safety and Soundness Regulation
– Deposit Insurance
• Monetary Policy Regulation
– Reserve Requirements
• Credit Allocation Regulation (eg., mortgages)
• Consumer Protection Regulation
– Community Reinvestment Act, Home Mortgage
Disclosure Act, Truth in Lending Protection
• Investor Protection Regulation
• Entry Regulation
Saunders & Cornett, Financial
Institutions Management, 4th edition
5
Types of FIs
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Depository Institutions
Insurance Companies
Securities Firms and Investment Banks
Mutual Funds
Finance Companies
Distinctions blurred by the Gramm-LeachBliley Act of 1999 that created Financial
Holding Companies (FHCs).
Saunders & Cornett, Financial
Institutions Management, 4th edition
6
Features Common to Most FIs
• High Amount of Financial Leverage
– Low equity/assets ratios. Capital requirements.
• Off-balance sheet items
– Contingent claims that under certain
circumstances may eventually become balance
sheet items (ex. Derivatives, commitments)
• Revenue: Interest Income & Fees
• Costs: Interest Expenses and Personnel
Saunders & Cornett, Financial
Institutions Management, 4th edition
7
Depository Institutions
• Commercial Banks: accept deposits and make
loans to consumers and businesses.
– Money Center Banks: Citigroup, Bank of NY,
BankOne, Bankers Trust (Deutschebank), JP Morgan
Chase and HSBC Bank USA.
• Savings Associations (S&Ls)
– Qualified Thrift Lender (QTL) mortgages must exceed
65% of thrift’s assets.
• Savings Banks
– Use deposits to fund mortgages & other assets.
• Credit Unions
– Nonprofit mutually owned institutions (owned by
Saunders & Cornett, Financial
depositors).
Institutions Management, 4th edition
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