ORGANIZATIONAL SET UP OF FINANCIAL INSTITUTIONS

Functions of Financial Institutions

1. Aids the flow of capital 2. Credit allocation 3. Provides economies of scale and

scope 4. Satisfies the needs of general public 5. Provides specialization and expertise 6. Assists asset transformation 7. Offers INTERMEDIATION

Intermediation

The process of transforming a secondary security into a primary security by a financial institution.

It relates to financial investments by savors

cash cash

Savors Financial Borrowers

Institutions

secondary primary

securities securities

Dis-intermediation

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 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

1. Liquidity 2. Maturity 3. Denomination 4. Risk

Types of Financial Institutions By Banking Business Nature:

Banks Non-Banks Non-Finance

By Business Operations: Thrift type Contractual type Investment type Other type

Thrift-type Financial Institutions Banks:

Commercial Banks Savings Banks Investment Banks (Merchant Banks) etc

Non-Banks: Deposit-taking Company, Savings and

Loan, Home Loans, Building Society, Credit Unions

Contract-type Financial Institutions

Insurance Companies: Life Insurance Accident and Healthy Insurance

Pension Funds: Mandatory Providence Funds Retirement Funds/Pension Funds

Investment-type Financial Institutions Investment Companies:

Closed-end Investment Companies - Investment Brokers

Open-end Investment Companies - Mutual Funds/Unit Trust

Real Estate Trust Investment Companies

Other Financial Institutions

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?

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 1. Transaction Costs 2. Information Asymmetry -- Moral

Hazard 3. Financial Risks 4. Financial Innovation

Solution

Information Asymmetry--Moral Hazard:

Information Symmetry and Full Disclosure

Regulation Reform Financial Intermediation Financial Risks: Risk Management and Control Burden Administration

Solutions

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 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